The COVID-19 pandemic is forcing lenders to revisit how they assess credit risk. Here are our recommendations for how you should approach making changes to your credit processes.
Why rethinking loan portfolio analytics matters:
Lenders have faced crises before that led to delinquency and bankruptcy spikes: the S&L debacle, the dot.com bubble, the subprime mortgage meltdown. This time, it’s different. At least for now, we’re still seeing strong credit performance in the United States despite shocking economic metrics.
Lenders can make their credit risk assessment protocols more effective by asking three key questions:
- Can we gauge the health of our loan portfolio more quickly? Many lenders are struggling to understand the health of their loan books. Bolstering models with external data can help you make informed strategic operating decisions.
- How can we adjust our credit models with sensible overrides? Existing models might miss possible risks given the current situation. To adapt, bankers are adjusting models by making judgments on the fly — but over time, you’ll want to move from qualitative model overrides to more formal, data-driven refinements of your model.
- How do we use what we learn from this crisis to prepare for the next one? In the longer term, you should aim to use platforms that combine data management and analytics capabilities with the ability to plug in expanded data. You’ll want consistent outputs for your portfolio and risk managers, and you’ll want a flexible framework to prepare for whatever may come next.
The bottom line:
Lenders that can quickly adapt their credit models to changing underlying credit conditions may be able to grow profitably while their peers struggle.