Credit Integrity and the Future of a Healthy Financial System
A virtual roundtable summary.
Since the beginning of the outbreak of Coronavirus, the challenges that financial institutions and their clients are facing have started to change. In March and April, the most urgent tasks were logistical: keeping businesses operating through work from home measures, providing online and delivery services, and supporting the distribution of medical supplies. Now, regulators and banks are looking at what’s next and wondering how the myriad of government responses will play out and impact the health of the financial system in the longer term.
As part of a weekly webinar series on COVID-19 mitigation efforts, the SME Finance Forum hosted a virtual roundtable on Making Adjustments: collection strategies, credit scoring, and regulatory forbearance. The panel was hosted and moderated by Matthew Gamser (IFC) with Alfonso Garcia Mora (The World Bank) providing opening remarks. Kamal Hingorani (Standard Chartered Bank, Singapore), Tyler Aveni, (WeBank, China), Neil Munroe (ICCR/BIIA), Tony Hadley (Experian) and Valeria Salomao Garcia (World Bank) shared their knowledge and respective experiences on the impact of COVID-19 on the future of credit scoring during the recovery phase and the implications of the crisis’ relief measures on credit information.
In his opening remarks, Alfonso noted that as every country has tried to tackle the crisis, there has been a multitude of different initiatives (Financial Sector Support Measures in Response to COVID-19). As a result, there is no standardized initiative either regionally or globally and as the world moves towards recovery, the steps taken by different institutions and countries will need to be assessed and refined to ensure they are time-bound, with clear risk assessment from the borrower and monitoring from the central banks. This is important as the impacts of these initiatives, including moratorium adjustments to outstanding loans, will impact all markets.
Kamal Global Head, Collections &Recoveries, Retail Banking from Standard Chartered stated that the bank is well prepared to respond to the need of its business banking clients across its footprint. As the future remains uncertain for many SMEs, most clients have been inclined to retain cash. Following prudential principles, Standard Chartered has set a global standard of offering relief to this client segment. While this standard defines the overall structure, local regulations supersede this standard wherever necessary.
Experian has also been in close contact with their clients, with Tony stating that banks today are looking at their underwriting standards and are starting to tighten credit standards with credit score thresholds shifting upward and higher credit scoring requirements for loan programs as an example. Additionally, many lenders are adding discretionary attributes to their credit scoring and using data and supplemental analysis with their data analytics. Many regulators and lenders had been anticipating a recession in the coming year or more, and while no one expected a global pandemic lockdown, many were already preparing to manage their portfolios and new clients in a recession and have been able to pivot more quickly as a result.
Tyler from WeBank explained that their initial focus was on maintaining infrastructure and operations in response to the crisis, much the same as “traditional” banks. What differentiates WeBank from other institutions is that it is exclusively serving individuals and SME businesses in China through online platforms only. With its mechanisms and data tools, WeBank includes different economic characteristics into their assessments as well as individual and aggregated client data to offer products and services that are more defined for a specific client. This more bespoke approach is aided by the frequency of data that is assessed, whether daily, monthly, or quarterly, and then included in the modeling. With SME loans working effectively as lines of credit, WeBank considers it their responsibility to supply credit and manage risk in order to support the short as well as longer-term impacts of the crisis. As a result of their successful model, regulators in China have been asking WeBank and others to support commercial banks with this data.
A major concern that emerged during the discussion was about the integrity of credit reporting systems following COVID-19. Neil from the ICCR, which provides central guidance on credit reporting, emphasized that a loss of credit information or incomplete reporting due to the crisis could result in a loss of confidence in credit information, leading to failures in the financial system. He stated it is crucial to maintain the integrity of the data, thereby ensuring the reliability of credit reporting systems, as lenders must not lose confidence, and borrowers need to be safeguarded. This means continuing to report client information to credit bureaus and credit registers but implementing flags and comments that can be used to correctly contextualize that borrower in the future.
Finally, from the regulator’s point of view, maintaining the safety of the banking system is a top priority. According to Valeria from the World Bank, it is critical that banks stay resilient to provide countercyclical support. Risk assessment should continue, and balance sheets should reflect as much as possible the risks embedded in the system. She asserted it would be a mistake to relax asset classification and review.
With governments easing lockdown restrictions around the world, the assessment of data from multiple traditional and non-traditional sources will need to take place in order that governments, regulators, and financial institutions can more accurately predict what needs to be done, and for whom, for economic recovery. While it is clear that COVID-19 is causing a big shift in the financial ecosystem as a whole, long-term negative impacts can be mitigated with adherence to credit risk and reporting standards, as well as with financial institutions expanding their sources of data and information that feed their risk models in order to preserve a healthy and stable financial system.
If you are a member of the SME Finance Forum, you can access the slides and the recording in this link.