Lenders are feeling the economic pressure from recent world events. We look at the impact on the industry and the expected rise in collections and recoveries.
Government and regulatory support measures, such as the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS), have undoubtedly been a lifeline for many organisations and individuals. However, the rapid roll-out of these schemes means lenders had to develop risk-management and oversight processes at short notice, introducing greater risks around conduct, the fair treatment of customers, fraud prevention and compliance.
Not to mention, the sad reality that, despite government support, many businesses will become insolvent, leading to a surge in non-performing loans and greater financial risks for banks.
BBLS offers loans up to £50,000 and is covered by the 100% government guarantee for lenders. Currently, the expected default for the scheme is around 35% to 60%.
On the other hand, the higher-value CBILS, offering loans up to £5 million, holds an 80% government guarantee for lenders, creating a greater degree of risk for banks.
It’s also important to note that borrowers who were struggling to repay loans taken out prior to ongoing lockdowns, but who ultimately default because of it, are not covered by government guarantees.
With banks are carrying a higher risk of default, an increase in collections and recovery activities is inevitable.
Identifying the scale of the problem
Banks currently don’t know the volume, nature or size of defaults ahead, or when they will crystallise.
Effective use of technology and data analytics can give early indication of borrowers in financial difficulty, and may allow lenders to pro-actively reach out to customers before they enter a collections journey. This can result in better customer outcomes and provide a series of breakwaters to help lenders manage the surge in collection activity.
Collections and recoveries are specialist activities that require significant expertise and resource, so factoring breakwaters into the operating model can reduce the risk of overwhelming collection teams with finite sources across the market to call on.
Conduct and protecting vulnerable customers
Maintaining good conduct, protecting vulnerable customers and treating customers fairly are always top priorities, and particularly important in the current economic environment.
Over the last year, there have been s166 reviews at major banks and other lenders around conduct and treatment of vulnerable customers - in particular within the collections processes. There have also been concerns over fees charged during payment holidays, the impact of payment holidays on credit ratings, and interest rates charged against government-initiative loans.
Keeping up to date on FCA guidance will continue to inform policies and best practice, while regular testing will ensure operating models are robust and in line with regulatory expectation. Getting the right balance between government initiatives, forbearance and responsible lending is tricky and demands careful navigation.
The ability to treat all customers fairly, accurately identify vulnerable customers, and work with them to provide good outcomes is paramount and lenders who get this wrong risk reputational damage and supervisory intervention.
Better use of technology
Many lenders, particularly smaller banks, don't make full use of all available technology, including data profiling, analytics, or process automation.
This includes the use of data analytics and artificial intelligence, which can help identify vulnerable customers. Better use of technology can make it easier for clients to make contact, which can make all the difference if they are in difficulty and can promote good customer outcomes. Effective use of technology can scale-up customer processes and improve agility, which is essential when dealing with large volumes of collections.
More efficient processes across the whole operating model, not just technology elements, can lower the cost of operations, increase debt-recovery levels and reduce loan-provision losses.
Incomplete data sets
Broadly speaking, poor data capabilities can hold firms back in terms of updating their operating model and data-enablement plans.
Incomplete data sets can hinder decision-making processes and effective scenario planning for collections and recovery activities. It can also prevent a fuller view across multiple product sets, and a single customer view – which is essential for treating customers fairly, regulatory compliance and improved credit scoring.
In the long term, a single customer view can help banks become more customer centric, in the more-immediate term, it can give a better understanding of each customer journey during the coronavirus situation, and support any compliance or conduct queries from the regulator.
Resourcing, outsourcing and third-party risk
Current arrears, collections and recoveries, and insolvency operations are not designed for the scale and volume of expected activity.
Redeploying resources from other teams can be one solution, but it requires appropriate lead times for training and introduces a greater degree of risk. It’s also a short-term fix for work that has no clear end date in sight. But, realistically, BBLS and CBILS initiatives are not core products for lenders, so strategic long-term investment for related collections and recoveries is not an option either.
For many larger lenders, outsourcing specific parts of the collections processes is the most-likely outcome, especially in areas that require limited client contact. This can allow banks to tranche the portfolio into smaller, more-manageable elements, but it requires effective oversight and co-ordination to support uninterrupted processes and good conduct throughout.
Compliance and fraud
The British Business Bank has already started to audit lenders, and there are ongoing concerns over fraud, which could affect up to 20% of BBLS portfolios, perhaps due to the broad definition of fraud in this instance.
Reviewing fraud indicators can support early action from lenders and promote compliance. Scaling up the operating model for collections and recovery teams, drawing on improved use of technology and specialist outsourced teams, as needed, can promote compliance and reduce fraud.
Rising to the challenge
Meeting the challenges around coronavirus support initiatives is not easy and there are a lot of factors at play here.
It’s important to recognise the degree of oversight needed, and the potential for these schemes to become mass-market issues. Finding the right customer outcomes, maintaining good conduct and carefully managing the bank’s risk profile is more important than ever. Staying up to date with emerging regulatory guidance on coronavirus initiatives, and responding rapidly, will help lenders navigate the year ahead.