Scale Up Credit Management Now, Banks Warned

US banks must increase the resources for the credit management units in preparation for a difficult period ahead, according to a new report from Accenture.

After the consultancy giant analyzed bank responses to the pandemic, it urged banks to take a “data-driven approach” to credit management, combining staff resources with digital tools to “provide personalized advice and empathetic guidance” to customers in difficulty.

It found that credit management teams had “shrunk back to bare bones” over the past 10 years and would need reinvestment to cope with the effects of loan defaults and missed payments.

Banks across the US granted payment holidays and temporarily postponed foreclosures after the pandemic hit in March. Approximately 9% of home loans were in forbearance at the end of June, up from 3% at the end of March, Accenture reported.

As government-backed support packages are rolled back, banks will find more corporate and individual borrowers in need of support when paying back loans or paying off credit card debt, Accenture said.

Banks were set to play a “critical role” in the global economic recovery, said Alan McIntyre, a senior managing director at Accenture and leader of its banking practice, but should “maneuver carefully” to balance helping customers and preserving their own solvency.

“As public programs wind down, the burden of holding extra capital to protect against credit defaults will fall on banks’ balance sheets,” he added. “To inform their credit management strategies, banks will need a clear-sighted and data-driven view of the current level of credit risk while keeping a long-term view of the customer at the forefront.”

The consultancy estimated that US banks would need to set aside between $265 billion and $320 billion to cover potential loan losses for 2020, compared to the $55 billion they set aside in total for 2019. Many banks have already increased their loan loss provisions in anticipation of more customers in difficulty.

However, the Federal Reserve’s most recent stress tests found that banks entered the Covid-19 crisis in robust shape financially. To ensure additional strength, it has placed limits on share buybacks and dividend payments to encourage banks to hold back capital.

In Europe, Accenture forecast that banks could be forced to write off as much as $460 billion, up from $90 billion in 2019, while Chinese banks’ write-offs could total $360 billion, an increase of $190 billion on 2019.

McIntyre also urged banks not to restrict providing new credit lines too much, as this area of the market was becoming more competitive with fintechs entering the space and more large companies providing finance options to help customers purchase their products.

“If banks attempt to aggressively reduce offers of credit, what might start as a slow trickle of customers turning to alternate lenders could quickly become roaring rapids that can drastically change the tide of lending,” he said.