Best-Practice recommendations for banks during this crisis
by Zaid Kamhawi, CEO, Qarar
It is fair to say there are very few people on the whole planet who have not been affected by this pandemic, and one of the pivotal roles in successfully navigating these turbulent times is undoubtedly on the shoulders of the banking and finance industry.
Banks in the region are playing a significant role during the COVID-19 crisis as general shock absorbers for their customers and for the economy at large. They are deposit collectors, credit grantors, and payment facilitators and therefore a play a vital role in the functioning of the economy. They are much more than commercial enterprises but rather providers of critical services to individuals and communities; their safety and soundness are consequently of utmost importance and, as already seen, their services have been earmarked as essential crisis-support services.
However, as the realisation that this pandemic may still have several months of ammunition in its tank, the clock is now ticking for an immediate and active response. For banks to continue to play this key role there are number of actions that they should take right now in order to identify long-term strategic implications on their ability to provide their services, ensuring a smooth bridge between the present and future. When it comes to business continuity plans, it is imperative that banks put in place provisions that include measures tailored around their workforce, digital offerings and facilitation of credit.
WORKFORCE AND RESOURCE PLANNING
Because the services that banks provide to customers, businesses and the community are essential, they need to ensure that they implement a well-designed workforce and resource plan around critical services and risk exposure, covering any customer facing operations or those that require physical presence.
FOCUS ON DIGITAL SERVICES
Physical movement restrictions are now in place globally. In response, banks will need to enhance their current digital offerings and relax some of the current restrictions.
OPENING ACCESS TO CREDIT
Obviously, no banking service is as important to business and customers as access to credit, and banks need to fulfil their mission in providing credit to their customers during this crisis more than any other time.
As the health and safety measures required to fend off this pandemic wreaks havoc on the economy and businesses, both regionally and across the world, many companies and individuals will be negatively affected by quarantine measures and lack of employment. Those who are in already in debt will feel the impact more so than others. These individual groups will require special support from banks to fulfil their day-to-day cash requirements via access to credit facilities. It is expected that even households with higher saving rates would require financial support. That is because savings are linked to global markets that have been negatively hit. When it comes to businesses it has been noted that the impact of the crisis will vary depending on the sector and who they service, i.e. business to business (B2B) or business to consumer (B2C). For example, tourism, entertainment and the automotive sectors, as well as those that that cannot shift to remote work, will be the most affected.
In these circumstances, banks need to quickly identify the most affected segments and customers and then define solutions that can support their clients and community. Some examples seen already include relaxed installment payment schedules. This will include proactively communicating with clients to understand their specific situation and adjusting risk-mitigation actions for early delinquencies and for non-performing exposures. Banks need to do that— not just as a part of their duty — but because supporting clients in these critical times will deepen customer relationships and reaffirm the role of banks as key enablers of the economy. In the meantime, regulators are not standing idle and are already relaxing rules for banks. For example, Saudi Arabian Monetary Authority (SAMA) announced on 25th March, with a view on making certain changes to current regulations regarding provisioning, as well as guidelines on how to treat customers opting for payment holidays or restricting of loans. When it comes to access to credit, SAMA encouraged banks to “support the private sector and assist in facing the effects of COVID-19 to ease decline in cash inflow and support working capital” as well as identifying those businesses particularly vulnerable to the volatility in the current economic environment such as airlines, energy, travel etc. This includes:
- General lending support such as restructuring and expanding existing facilities.
- Providing payment relief for borrowers who are in the process of finding new employment or for those who lost their jobs
- Offering bridging loans for employers to meet payroll requirements
- Waiving minimum balance requirements
- Reducing credit card interest fees
During these times it also expected that companies will be forced to draw on credit lines to support working capital and stockpile cash. While additional drawdowns on retail lines of credit are also to be expected, this will require banks to have in place strong internal liquidity-management practices to be able to effectively support market liquidity and customer borrowing needs.
While the exact financial impact of the COVID-19 crisis remains highly uncertain and will be bank-dependent it is expected that financial institution performance will be hit across all dimensions — fees, interest revenue, losses, and expenses.
- As such, fee income will likely fall, driven by lower consumer spending in retail businesses.
- Net interest income will remain low as rates remain compressed.
- Credit losses will most likely increase across most sectors, across small businesses and in certain retail segments. For example, self-employed workers, within commercial banking, travel, tourism, and entertainment segments will be the hardest hit.
- Remote work operating costs may witness an increase as banks scramble to setup work from home operations.
We are undoubtedly in an era where we have come to expect the unexpected. For banks, the only viable course of action through this storm is an agile, pragmatic and timely response, empathic communication with their customers, and a realistic awareness of the likely financial impact.