Banks have a vital role but must proceed with care
While the impact of COVID-19 on consumers and small businesses was swift and severe, the level of non-performing loans by the end of Q1 FY20 was relatively low. The actions of central banks around the world to flood credit markets with liquidity has certainly helped stave off disaster. However, as the crisis unfolds, banks will play a critical societal role in helping both consumers and businesses navigate what is likely to become a challenging couple of years.
Most banks today have significantly more capital at their disposal than they did at the time of the 2008/9 crisis. They are well positioned to emerge from COVID-19 as heroes to their embattled clients, not villains that caused or exacerbated the crisis. But to do so they need to resolve a host of conflicting priorities that matter greatly to regulators and shareholders as well as clients.
They will need a highly informed approach to credit management that will help them make clear-sighted decisions about how parts of the economy should be restructured. Too indulgent, and the economy won’t adapt to serve a post-COVID world. Too harsh, and they risk becoming pro-cyclical amplifiers of the crisis.
To balance these diverse requirements, it would benefit banks to rethink many of their credit-management approaches. We propose taking steps across four key credit and collection areas:
What we are experiencing today is a ‘phony war’ that precedes the escalation of the credit crisis. At this time, banks can hope for the best but should prepare for the worst. The most effective among them will anticipate the crisis and address it holistically, thinking beyond funding debt and innovating for a post-COVID-19 recovery.
To learn more about the steps you can take now to outmaneuver the impending uncertainty and enhance your credit management capability—for the immediate as well as the long term—register to read our report or reach out to one of our team members listed below.