The impact of lower oil prices and the recently announced government cuts to public sector spending have been widely reported. Less well discussed have been the effects in terms of negative consumer sentiment and the resulting impact to other sectors in the economy, notably the impact on retail bank policy and lending.
The indirect impact to the retail banking sector is far reaching; but can be mitigated through the application of an integrated approach. The current economic situation can be viewed as providing an opportunity to improve on existing practices to enhance a data lead holistic business view, driving cost efficiencies and more effective management control.
Current Impact on Customers and their Behaviours
- Retail sales fall, a drop in household spending by 25-30% has been forecast in the Saudi market, as customers show increased signs of stress due to over indebtedness.
- Increased restructuring requests and new lines of credit from customers.
- Increased credit card limit utilisation.
- More customers becoming delinquent & rolling over monthly balances.
- Customers switching credit providers and seeking alternate lines of credit.
Examples of Impact on Retail Banks
The typical impacts of changes to customer behaviour can be seen in the illustration below:
- Deposits are diminishing, resulting in liquidity and cost pressures
- Increased provisioning is required
- The customer credit profile has changed and will be reflected in their behaviour and credit bureau scores
- There is a likely increase in early delinquency and lower self-cure rates
- Bank product pricing strategies will need to be changed to accommodate higher risk
- Debt rescheduling to be reviewed
Way forward – A Data Driven Solutions Approach
The lenders that are better equipped to manage and even prosper in such times, are those that have adopted an integrated approach to risk management and able to minimise potential losses. That is, all elements in the organisation working together to support the business strategy, for example operations, process, information and technology (OPIT). These organisations also see the importance of speed and velocity of change that enables them to work on the basis of a cycle of continuous improvement, and are thus more resistant to future shocks.
These elements when combined with an analytically data driven approach and delivered through the entirety of customer credit lifecycle, assist lenders address credit risk and take proactive decisions.
In this analytical approach the quality of the input data is key to determining the complete customer picture and any subsequent actions. The Kingdom is fortunate for the external data components to have good quality credit bureau data from SIMAH. These data, which includes real time alerts and Big-Data through the Portfolio360 solution, can be overlaid on a regular cyclical basis with existing in-house customer information and with the support of Qarar, our decision analytics business, help our Client’s to understand a full picture of their customer’s exposures and likely behaviours. Examples of the type of advisory services from Qarar include:
- Current State Assessments and Health checks to help stress the OPIT model and identify areas of immediate action
- Re-structuring or revised payment plans based upon a segmented approach using internal and external data
- Debt Velocity Models which seek to assess the speed of customer over-indebtedness , a means to segment and appropriate actions to take
Further applications for the credit bureau data when applied with analytics can support lenders with the following:
- Credit policy review
- Scorecard re-alignment and calibration
- Credit limit management (decreases) DBR monitoring and management to determine risk profile movements
- Early warning and pre-delinquency identification, based on early stress signals of customers with a high propensity to flow into collections
- Redefined pre-delinquency strategies to pro-actively manage higher risk segments with accelerated treatments
- Identify customers with strong credit behaviour that are eligible for debt rescheduling and possibly alternative products
- Improved segmentation of customer for revised collections and recovery strategies
The analytical approach is not only important to providing strategic direction, as can be seen above it is equally as important to the effective management of short term risks. For example to ensure suitable liquidity is accounted for in the short-term to manage increased re-structuring, more effectively manage operational teams (given increased manual work in lieu of automated re-structuring decisioning capabilities) and help to re-enforce the feedback loop and maintenance of high quality data with the credit bureau.
To conclude, banks and retail lenders should grasp the opportunity to develop a pro-active approach through the application of data and predictive analytics, not only as a temporary fix to the current economic trading conditions, but to embed the discipline of an analytical decision based culture in their respective organisations to protect against future shocks.