Managing Credit Risk in the COVID 19 CrisisMay 292020
Wherever there is the granting of credit or services with the hope of receiving payment after providing such, credit management will be the core feature in the success or demise of that company. In the midst of COVID 19, it is essential for the survival of those companies within the credit industry to implement efficient and effective credit management techniques to mitigate against the increased risks that are present and more prominent due to this global pandemic.
It is apparent that the COVID 19 pandemic will have an impact on the economies of our nations with damaging effects on the credit industry. The shut-down measures implemented globally because of COVID 19 led to a loss of revenue and income for many, the complete closure of business for most which will, in turn, affect the performance of existing loans and servicing of debts. Further, where cash flow and funds are not readily available for individuals to conduct business, then there will be a drawdown on what credit facilities are available to them. Therefore, many institutions found themselves having to facilitate the further extension of credit with a significant decrease in their own cash flow due to the failure of individuals and companies to pay debts during the shutdown. In the United States, it was reported that nearly 15 million credit cards were not paid in April as such, financial hardship programs with deferred payments were allowed.
In such a climate, there is a need to get ahead of potential risks and conduct an analysis of credit portfolios, noting individuals or companies that operate in sectors still viable or those that are consumer-based services that would more than likely be significantly impacted. Understanding the situation at hand is an integral step in beginning to manage credit risk to be faced by financial institutions. It may be also helpful to categorize the industries by risk grades.
Another useful step is to review the financial products being offered as this climate may require additional protection through requesting collateral for higher risk industries or higher deposits. However, in noting the preventative aspect of credit risk management, there will be an increasing need to analyse the creditworthiness of the customer that is seeking credit. It is in this aspect where credit reports which also feature disaster credit scores can aid. In reviewing the standard credit report, individuals would be aware of how a person serviced their debts previously prior to COVID 19 which can serve as a good indication as to how they will service their debts in the future, provided that they have not been significantly affected financially by the pandemic. However, if a disaster credit score is also provided this may present a better idea of how that person has been able to service their debts amidst the crisis. Company policy may then be developed to determine whether allowances would be made for those temporarily affected. Thus by conducting the assessment through an analysis of one’s credit report supported by a review of the background of the client, the industry that they are in, and whether it is one not viable in the present crisis are all measures to employ for managing the credit risks. Institutions may have to question whether the potential client has demonstrated the ability to adapt and transition to meet the circumstances.
On the other side of credit management, the recovery on credit already extended (debt management), ensuring effective consumer dialogue and communication in a manner that notes their concerns but also offers some debt management tips in the active management of their accounts can go a long way. Opening the line for dialogue and communication may ensure that attention is paid to your debts which should in turn, when circumstances permit, result in payments of your debt. As we seek to digitalize and go online, we cannot forget that human relations and interaction still goes a long way.