Credit Risk Management in a post-COVID-19 world | Risk Advisory Blog | Deloitte Australia has been saved
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As lending solutions and credit assessment come increasingly into the COVID-19 crosshairs of our lenders, they have pivoted to providing relief to their most impacted and vulnerable customers. This has included offering credit extensions and payment deferrals.
The most recent Australian Banking Associations bulletin put these at almost 750,000 loan deferrals valued at $224bn, almost 458,000 mortgage deferrals worth $165bn, and $101bn worth of new business lending as at 27 May 2020.
Lenders have acted quickly and with purpose to protect their customers and themselves in these uncertain times, and given the continuously shifting landscape, they continue to be required to take decisive, timely and informed actions to manage their credit exposures.
As lenders navigate to respond to and recover from the challenges of managing credit risk through the crisis the following five areas require constant attention.
1. Risk appetite and policy reset: With the onset of COVID-19 the risk appetite of lenders has, out of necessity, required a re-think. This has meant each organisation’s underlying activities, processes and procedures have had to shift in response. A few examples of changes lenders are considering include:
2. Credit settings across the credit lifecycle: The way credit is managed across the customer lifecycle (from origination through to loss recovery) needs to be reconsidered.
3. Data and model management: Lenders need to understand what data is leveraged to make credit decisions. Typically, this is data supplied by customers, as well as the data the lender may have on that customer, bureau data, and other external data sources such as bank statements and payslips.
4. Portfolio monitoring and credit book forecasting: With the rapidly changing credit landscape, it is critical to set up the right monitoring infrastructure to support lending decisions. This will be a key enabler to managing credit risk over both the short and long-term. It won’t be feasible to monitor every segment of the credit book, and lenders should define and prioritise key segments that make sense for them. Some of which may include:
• Unemployed customers
• Underemployed customers
• Customers that have had their income reduced (which could potentially be identified through their transaction accounts)
• Customers employed in sectors that have been designated as ‘high risk
• Credit Card Customers who have been long-term purchase inactive.
5. People and capability: People capability will be the main enabler for organisations to successfully navigate the challenges ahead.
Lenders that respond to their immediate priorities in a prudent and effective way will minimise their downside risks, while building out capabilities that will make them better at managing the very important credit risk challenges ahead.
Will Chan has 20 years experience in financial services and a strong background in banking, credit risk and risk transformation programs. He brings subject matter expertise in regulatory compliance, analytical modelling solutions and credit operations.
Bill has 20+ years of industry experience having held multiple positions at Latitude Financial Services, GE Capital, and NAB. Bill advises a range of lenders on how to enhance their credit risk management capabilities from a people, process, data and technology perspective. He is particularly focussed on the ways in which these four elements can work together as an enabler for lenders to manage the trade-offs between customer experience, cost, risk, and reward.