Amid economic uncertainties courtesy of state response to the coronavirus disease 2019 (Covid-19) pandemic, the banking industry is advised to improve its credit risk management through data analytics.
Audit firm Isla Lipana & Co. said in a paper this month that banks have exposures in vulnerable sectors during the pandemic that has been causing major economic downturn.
Among them are retail and wholesale and manufacturing industries, which have combined outstanding loans of P2.3 trillion as of end-December 2019.
With this, Isla Lipana said that banks must be data-driven when managing risks for existing and new borrowings.
The audit firm suggests to “build a dynamic ‘credit-decisioning’ framework and credit scores that incorporate the potential impact of the pandemic.”
This means that the traditional credit scoring employed prior the pandemic, Isla Lipana said, may undergo some revisions to consider the current situation.
For example, banks need to look at how the pandemic would continue to “behave” in certain areas of the country, the audit firm said.
Trusting the service
Banks must also bring into the equation the future economic position of the country, Isla Lipana said, taking into consideration the Philippines’ path to recovery, inflation, output growth and interest rates, among others.
The financial sector could also study the creditworthiness of the new and existing borrowers during this pandemic, it added.
“Developing these credit scores and scenarios that incorporate the potential impact of Covid-19 may be done in-house or can be entrusted with professional organizations that are adept with data analytics and have robust industry experience,” Isla Lipana said.
The banks can also redesign the loan terms by considering borrower-specific characteristics and circumstances including age, employment status, industry, credit history and number of Covid-19 cases in the area, among others, it added.
“These data-driven approaches may not only help the bank keep high quality loans–these may also serve as the banks’ key differentiator in keeping and attracting clients that would trust their service,” the audit firm said.
Jittery ratio
Apart from exposure to outstanding borrowings from vulnerable sectors, Isla Lipana noted that a potential increase in nonperforming loans (NPLs) was also a major concern.
The audit firm said that the decline in consumer demand—because of lockdowns, layoffs and disruptions in operations—could slow down the cash flow of businesses and individuals as well.
“Without effective action by the regulators and the banks, the nonperforming loans may rapidly rise as borrowers struggle to pay their principal and interests,” it explained.
Citing data from Bangko Sentral ng Pilipinas, Isla Lipana echoed that gross NPLs of banks rose by nearly 20 percent to P246 billion in end-March from P205.9 billion a year ago.
This translated to an NPL ratio of 2.21 percent for the industry, which is the highest for the comparable month in the past three years.
Proactively reaching out
The audit firm said banks should also focus on harnessing a healthy relationship with their clients during this trying time.
While the pandemic has prompted digital banking, Isla Lipana said that not all customers found it easy to shift from the traditional. With this, it urged the banking sector to “proactively reach out” to their customers needing more assistance.
The audit firm is also proposing that the banks combine both human and digital “touchpoints” when addressing customer needs.
“This means being able to help address customer concerns in multiple channels–be it through the bank, subject to social distancing measures, or online chats,” it
explained.
At the same time, Isla Lipana said that the banks’ customer service personnel should be trained on how to properly interact with borrowers.
“As more banks turn to data-driven solutions to manage credit risk, they must not forget that numbers alone would not help their most important stakeholders–their customers–to be at peace,” it concluded.