Debt management and COVID-19 - why lenders should act now
December 09, 2020
According to the British Business Bank, which administers the Government’s emergency COVID-19 loan response, by the end of October more than 1.4m businesses had successfully applied for government-guaranteed loans, worth just under £62bn. This included £40.2bn of Bounce Back Loans (BBL) (100% guaranteed by the Government with no fees or interest to pay for 12 months) and £17.2bn lent under the Coronavirus Business Interruption Loan Scheme (80% guaranteed by the Government), both directed at SMEs.
There are growing concerns about how much of this lending will be recoverable. The National Audit Office has warned that up to 60% of loans granted under the BBLS (worth up to £26bn) may not be paid back. Fraud is a major concern; the British Business Bank said lenders had blocked almost 27,000 fraudulent BBL applications between May and October this year.
There has also been a significant amount of support provided to consumers: at least 2.5m mortgage deferrals, 27m interest-free overdrafts offered, one million credit card payment deferrals, and over 650,000 deferrals on personal loan payments. Rapid increase in mortgage applications, which have hit a 13-year high in reaction to the stamp duty holiday, could harbour potential credit issues for the future.
The unique circumstances of the pandemic have created a number of exceptional challenges for lenders:
- Overwhelming volumes. The infrastructure needed to manage changes to lending on this scale simply isn’t in place. Most of the major banks put a pause on new business bank accounts in response to overwhelming demand to focus on existing customers and the volume of emergency loan applications. This is only a temporary solution though.
- Compliance with complex regulatory requirements and expectations. Many of these products are regulated by the FCA, others are covered by the Lending Standards Board's Code. The treatment of borrowers will need to be fair, transparent, aligned to specific rules where needed, and more generally aligned to nuanced expectations about the treatment of vulnerable customers and 'fairness'.
- Challenging timelines. New legislation and guidelines around the various support schemes have had to be adopted at lightning speed.
- The need to control costs. Despite the volume of transactions and workload for lenders, cost pressures have not gone away. Any solutions need to be cost effective.
- Difficulty assessing credit risk. The basis for assessing a customer or business’s credit risk requires a new lens. Geography and sector have a significant impact, due to local case rate and the Government’s tiered response. An added complication is that some payment holidays are not reflected in credit risk ratings.
- A pressing need for sensitivity. Huge sensitivity is needed when dealing with customers and banks and other lenders are being watched closely. The potential for reputational damage if a mistake is made is very real indeed.
These challenges will undoubtedly place huge stress on the debt management processes of banks and other financial institutions. Even those with existing capacity will struggle to meet the resource requirements when the demand peaks as loans become due and payment holidays end, likely next summer. With a critical opportunity to plan ahead, business should consider some critical resourcing questions:
- How much extra capacity will we need?
- How long are we likely to need extra capacity?
- Could we improve our existing processes?
- Are there other ways to resource this in the short term?
The scale of debt management operations that will be needed in the coming months is unprecedented. Addressing these questions now means you’ll be in a much better position to support customers and manage your operations.
If you’d like to talk to us about supporting some or all of your debt management operations with an execution managed solution, please get in touch. We offer delivery that makes the difference combining our delivery capability with leading data analytics and technology solutions.
Also read about Financial Crime execution managed solutions and how we can help.