Against a backdrop of uncertainty and financial instability, the importance of banks and the role they play at both a local and global economic level has never been higher. Retail consumers, small and medium enterprises, and commercial entities are looking to banks for increasing levels of support and assistance, especially as government-introduced stimulus programs start to mature and expire around the globe.
Banks in some markets have seen new opportunities present themselves because of the pandemic, in particular the acceleration of new digital processes and technologies. The FICO Advisors team of consultants has just published our third COVID-19 bulletin to help banks adapt and thrive in these unprecedented conditions.
Here are our five recommendations for credit risk managers.
1. Consider all your customer risk segments
During the initial stages of the crisis two broad segments of customers were emerging: those adversely affected by the financial effects of the pandemic and those seemingly unaffected. Now, as a second wave hits hard, more customers are becoming more vulnerable to being affected. Different segments are starting to emerge, especially those customers who have not yet been economically or financially impacted but have moved into a high-risk category due to a range of factors, including the industries they work in or their ability to work remotely for the long term. In addition, many of the customers previously rated as high-risk have already received two or more different benefits, such as payment holidays and interest rate discounts.
Therefore, we recommend that further detailed analysis of customer portfolios and more granular segmentation and modeling be applied to identify those customers already affected. New segments could include:
- Rescued but still at risk
- High risk to be affected in the short term
- Potential risk to be affected in the medium term
- Customers who appear to be financially resilient for the medium to longer term
For each segment or sub-segment, tailored customer journeys and risk strategies and treatments should be developed and applied, while ensuring that funds are made available where possible and needed, and loans that can be further rescheduled
2. Consider fees, rates, and charges
Where necessary, banks should consider deferring or waiving fees and overlimit charges, and adjusting loan conditions and repayment terms for customers who were not affected by the first wave but have been, or are about to be, by the second wave and who can demonstrate the appropriate willingness to repay but currently lack the ability.
3. Don’t give up the “Captain’s Log”
Make sure your portfolio and policy chronology logs are consistently updated with all actions taken and details of accounts that are in programs and predicted impacts. In addition, maintain a detailed log of all significant macroeconomic changes so that cause-and-effect changes can be identified and understood.
This account history will be on your books a long time — months or years from now — so that someone with no first-hand experience of the crisis will be able to understand what happened at a detailed level. These details need to include not only the impact of the crisis, but policy changes made in response, which, in turn, affect portfolio performance, risk model validations, and policy analysis. Do this even if you elect not to put special programs in place. Making note of the effects of the crisis and the regions impacted will help you interpret any unusual behavior patterns you later see in the data.
4. Acknowledge that there are no “unaffected customers”
Many customers resisted the first wave — now no one is left behind. Despite the new environment, not all portfolios will necessarily be in arrears. However, the previously unaffected customers should not be overlooked.
Keep an eye in the behavior score deterioration, be bold and implement immediate pre-delinquency measures to ensure a best-in-class customer experience. Also, honor those customers who kept the relationship while in turbulent times. Those are the ones who will keep the portfolio afloat, providing profit while the onboarding / origination diminished.
5. Store data and prepare to review behavior scorecards and models after the crisis
Customers adversely affected by the crisis may experience changes to their income levels and cash flow, leading to changes in payment behavior and even involuntary delinquency.
New variables can be derived from:
- Customers who received payment relief measures during the first wave
- How these customers subsequently performed
- Different characteristics or behaviors relative to customers who were saved versus those still in arrears
- Regulatory affected portfolios
There is no precise method to guarantee which variables will explain future behaviour. However, all variables, new and traditional, should be stored and all relative actions stored and reactions closely tracked.
In general, redeveloping models should be prompted by the need to improve accuracy and/or relevancy in future model developments. Historical data that overlaps with the COVID-19 economy should be avoided or used with caution, since credit need/payment behavior will not represent “business as usual”.
Want to learn more? Read our full bulletin, with recommendations for collections, fraud, digital banking and the enterprise: Coping with the COVID-19 Crisis: Adapting to the New Reality.