Beyond COVID-19 Mitigating on NPLs
Photo by Markus Spiske
The novel coronavirus pandemic has thrown businesses and financial institutions on a new normal. Objectives of credit providers have moved from growing the bottom-line to capital preservation. However, in the wake of the COVID-19 pandemic, credit providers need to remain committed to their consumers. As communities take measures to contain the pandemic, credit providers should play their part by ensuring availability of credit to consumers and that they take advantage of the monetary support given by the Central Bank of Kenya. They should also give their consumers the much needed support to enable businesses and livelihoods build resilience during this crisis. There are two main ways of supporting consumers.
1. Loan Restructuring
Under this model a credit provider with the consent of the consumer extends the repayment term of the consumers loan facility for a reasonable duration. We currently do not know the full extent of the pandemic in Kenya i.e. whether treatment will have been found before too long. Therefore, credit providers should hold on to the restructuring process until a treatment is found or there are clear indications that the novel coronavirus can be medically managed. Loan restructuring works best when cash flow challenges are temporary or the consumer has not been badly affected. A restructure of a consumers’ facility would be a good option since it speaks to their resilience. Credit providers also need to take note of businesses and retail consumers that are less hit by this crisis. This also puts a credit provider’s diversification strategy to test i.e. diversification by product or by sector.
For regulated institutions, loan restructuring processes have already been spelt out for them by the regulator. However, for non-regulated institutions they will have to rely on their internal policies to effect their restructures. Consumer empathy and centricity should be factored in by credit providers since consumers will remember how they were treated during this difficult time.
2. Loan Refinancing
Under this model the financial institution evaluates a consumer's total liability with an aim of consolidating them and offering a repayment plan that will help consumers meet their loan obligations. This will be the most probable scenario for retail and corporate consumers who will be severely hit by the novel coronavirus. Regulated institutions such as Commercial Banks, Microfinance Banks and deposit taking SACCOs already have guidelines that have been approved by their regulators. Non-regulated credit providers will have to rely on their internal policies and possibly refer to best practice by industry practitioners.
The following tools will be useful to credit providers in evaluating refinancing proposals from their customers.
a) Credit History
The Credit Reference Bureau is your ideal partner of choice in the evaluation of your consumer’s credit history and repayment behavior which account for a significant weight in the scoring of individuals and businesses. A consumers’ credit history gives insight to the credit provider on the credit behavior of consumers. It is in the credit provider’s interest to support consumers who move from good to “bad” categories based on the effects of the COVID-19 pandemic. Based on the information gathered the credit provider will then determine which consumers will be assigned higher credit limits under defined repayment terms. Credit providers are encouraged to refinance loan facilities so as to avoid total default, improve cash flows, reduce opportunity costs and ensure consumer relationships are maintained if not enhanced.
b) Cash flow Analysis
Some businesses have scaled down on operations only allowing the essential staff to run the day to day activities. A financial institution is also a business. It needs to improve cash flows of its consumers as it improves its own. The Central Bank of Kenya reduced the Central Bank Rate (CBR) by 100 basis points to 7.25% and the Cash Reserve Ratio CRR to 4.25% from 5.25% in a bid to improve liquidity in the market. We also hope to see interest rate cuts in the pricing of loans being made by credit providers. Financial institutions will need to run analyses of their customers’ accounts so as to better understand them. Evaluation of transaction/payments data (pre and post crisis) will be critical in identifying customers severely hit by the pandemic.
c) Relationship Management
Credit providers should also reach out to customers and offer refinancing terms especially to those customers with multiple facilities. Financial institutions should advise consumers on the two avenues (restructures and refinancing) that will enable them get back to normalcy. Personalized messaging via email, text messages and calls should encourage consumers to start negotiating terms that will be beneficial to them. Aggressive collection practices will not bear much result, since consumers are more concerned about their livelihoods. Waiving of late payment fees and soft collection strategies are encouraged.
Stay safe! flatten the curve!