Adapting lending in a time of crisis to alleviate customer hardship and bank pressures

The global impact of the COVID-19 pandemic on the financial industry far exceeds anything we have seen in our lifetime. Record unemployment, voluminous requests for hardship support, and the likelihood that loan defaults will significantly increase. Along with higher net charge-off rates and other financial impacts, there is significant pressure on banks to rethink their lending programs and practices to not only respond effectively now, but also to rebound successfully once the pandemic is contained and economies fully reopen. 

Economic models represent uncharted waters because the pandemic is unprecedented and, in every country, there is a lack of historical financial data to support model sanity checks. Accurate economic forecasting is going to be more “art” than “science” for now.  

CGI is working with banks worldwide to deliver business recommendations and technology solutions, especially in the area of lending, to address the immediate crisis and minimize the financial impacts of COVID-19—both now and into the future. 

In this blog, I, along with my colleague, John Jensen, lay out key insights for banks to consider as they address pressing lending challenges related to COVID-19. 

Type of lending determines a bank’s risk profile and course of action

Two types of lending are dominant during this crisis—government loans and bank loans. A bank’s risk profile and course of action tie directly to the funding type.
 
For loans made with government funds (e.g., Payroll Protection Program loans in the U.S.), the role and risk profile of banks are simple and limited. Banks underwrite the loans, disburse the funds, collect underwriting fees, and possibly administer the programs. There is no risk for banks because these loans are government-backed, and the banks’ income stream consists of fees rather than interest payments.
 
For loans that are made with bank funds, the role and risk profile of banks is very different. While initial bank actions are the same as with government loans (i.e., underwrite, disburse, collect), the risks are much higher because of the crisis. Despite loan deferral programs and foreclosure moratoria in place across the globe, these stopgaps—unless extended—will soon end. When this happens, many of these loans will already be past due, and many borrowers will lack the ability to pay in the near future. As a result, banks will have to work out repayment plans or put loans in default and try to recover and liquidate collateral if there is any—a  process that can take months to years and during which the bank is not earning interest income.

Seven recommendations for rethinking lending practices

Whether handling voluminous requests for government loans or helping customers with bank financial hardship programs, here are seven recommendations for rethinking lending during the pandemic:
 
1)    Invest in customer self-service. To ease the collection process and reduce the chance of bankruptcy, invest in customer self-service and automation solutions to maintain contact with borrowers and reduce the need for additional collections staff. Many banks have developed some type of web-based interaction, but most current solutions fall short of what is required to service the millions of loans expected due to customer financial hardships in the next few months, as well as in the years to follow. For the most part, bank customers will use digital engagement channels and are, in general, digitally savvy. Whether accessing self-service options on a website or via a phone application, a large percentage of customers will use a digital channel, if one is available.

2)    Invest in digital workforce management. Digital workforce management will be “table stakes” for survival during the COVID-19 recovery phase. This is not about hiring more people, but rather implementing digital technologies that enhance current staff’s ability to manage a staggering volume of customer needs. Experts predict that, in the U.S. alone, four million customers will potentially exit hardship plans in early to mid-July 2020. Chatbots, intelligent web interfaces, and back-office bot workforces can support a large portion of this work, without the need for additional staff.       

3)    Seek to minimize the percentage of funds reserved for loan losses. Talk with regulators about minimizing the percentage of funds to be reserved for loan losses when the bank and the borrower are attempting to negotiate a revised payment plan.  

4)    Establish a credit “war room” for commercial loans. Given their higher loan balances and more complex loan structures, establish a commercial lending “war room” that brings together all necessary players required to address dynamic market conditions and develop a responsive credit strategy. 

5)    Do not rely on modeling. There has been a great deal of discussion about modeling and whether this is a worthwhile endeavor. The short answer is that, because we have never seen anything like this before, most models will be wrong by default. Instead, consider a variety of scenarios, use those scenarios to develop a response, and be prepared to update scenarios quickly in response to changing market conditions.

6)    Ensure strong regulatory compliance. The regulatory bar is set high for COVID-19 responses. In the U.S., for example, the Consumer Financial Protection Bureau (CFPB) is going to enforce a highly customer-centric regulatory model. Projections of billions in regulatory fines are likely realistic if financial institutions do not follow the four principles of managing loss mitigation programs as laid out by the CFPB: accessibility, affordability, sustainability, and transparency. Digital enablement will ensure high-quality customer management across the customer life cycle—from request, to approval, to post-approval support. In addition, performance tracking of customer hardship programs is a performance barometer that the regulators will expect.

7)    Seek a digital enablement partner. Look for a digital services provider that can deliver integrated digital programs across the enterprise. In particular, seek a partner with integrated digital solutions for automating financial hardship loan applications. Solutions that involve the integration of virtual servicing agents can provide an interactive experience that would fully support 30-40% of all financial hardship requests that agents would need to manage. Additionally, virtual agents would reduce the amount of time required by an actual agent by 50% or more, if the virtual agent gathers the initial information required for a hardship evaluation. Such a partner also can relieve the pressure from the intense competition for digital skillsets expected in the short term. 

Digital investment and enablement is key
 
We know very little about how the COVID-19 pandemic is going to play out or how governments will continue to respond over the long term. When will economies fully reopen? When will social distancing measures end? Will the virus be cyclical like the flu? Will an annual economic shutdown for two to three months become “business as usual” for the global economy?

With so many unanswered questions, banks are wise to focus on implementing the right technology to ease customer financial hardships while reducing their risk and maintaining business equilibrium. Digital solutions for lending, customer self-service and financial hardship programs can spare banks from high customer dissatisfaction, labor expenses, and default rates, as well as the risk of regulatory non-compliance and fines.

CGI is working with banks worldwide to help them respond, rebound and reinvent in the face of the COVID-19 pandemic. To learn more about our work, contact either of us at andy.schmidt@cgi.com or john.jensen@cgi.com.