The Reserve Bank of India (RBI) has provided a limited period window to restructure loans without downgrading the loan account to “non-standard” for (eligible) customers affected by the COVID-19 pandemic. On its own, debt restructuring is an excellent tool to allow customers to re-negotiate the terms and ensure that the bank recovers its principal. It is, however, important to have continued focus on credit and fraud risk and to use the tool effectively for risk mitigation (not for book growth).
At Think Analytics, we help our partner clients manage such risks through multiple offerings, like credit risk scorecards and probability of default models, developed by our team of data scientists. There is also the option to integrate with Algo360, our flagship product for alternate data elements; commence remote KYC validation through Kwik.ID, our video KYC product; and develop custom applications (web and mobile) for lenders to embark on a digital transformation journey.
Together, we can devise a solution that can be applied as a preventive risk mitigation policy. This solution can also be used for providing top-up to customers who are on the other side of the curve, displaying financial stability.
Each customer is re-evaluated on their current capability to service a loan—however, six months of payment holiday unfavourably impact the intent to pay even when they have the ability.
The following table presents some of the recent challenges faced by customers:
When a borrower faces financial stress, they reach out to their lender to revise the terms of their credit facility by modifying one or a combination of tenure of loan/ interest payable on residual loan amount/ outstanding loan. This ensures that as a borrower, one does not miss out on payments towards their loan. Basel norms define debt restructuring as an indicator of asset quality going northwards and wants banks to keep capital allocation for the eventuality.[i] Among the Asian Tigers, debt restructuring was considered as standard business practice in the early 2000s until the global financial crisis.
While debt restructuring is efficient tool to ensure that the bank recovers its principal, it has its own set of challenges. For example, since 2018 in India, there have been instances of a few stalwart banking leaders being asked to move on as debt evergreening was highlighted as favouritism.
Financial institutions can leverage data from the credit bureau as well as review customer behaviour and professional details to help customers plan their restructuring requests (for more information, check Appendix 1a and 1b).
A collaboration with Think Analytics will ensure ease of operations, manage alternate data and manage government benefits. We combine analytics and web application development to service customer requests for restructuring and top-up. Our products and offerings will aid the loan-restructuring process to become hassle-free for both financial institutions and their customers. The proposed five-step process is:
1. Analyzing behaviour score (B-Score): Categorizing customers based on their past performance on loan. All customers who were more than 30 days due as of March 2020 would be categorized as red, along with other customers whose past repayment behaviour models those with high-risk default probability. The remainder would be evaluated for restructuring basis their risk profile.
2. Identifying problems based on risk score:
3. Restructuring the application:
4. Developing a business rule engine to approve restructuring:
5. Establishing an admin portal: Manual review portal for the Credit and Operations team to review documents and approve/reject a request
This solution can be applied as a preventive risk mitigation policy where, every quarter, customers who show signs of financial stress can be assessed for debt restructuring, while collections strategy incorporates the possibility of a customer seeking relief. The solution can also be used for providing top-up to customers who are on the other side of the curve, displaying financial stability.
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Financial institutions can leverage data from the credit bureau as well as review customer behaviour and professional details to help customers plan their restructuring requests.
While using data from the bureau and analyzing customer behaviour are ideal sources of risk evaluation in a normal world, they have proven to be inadequate amid the pandemic.
The onus of ensuring correct status post moratorium is on the customer and not on the bank or bureau. Currently, most scorecards depend heavily on repayment cycles and other behavioural indicators that have lost their importance. The stringent timeline by RBI to restructure loans for all such customers by 18 December 2020is further adding to the problem. Hence, it is of paramount importance that alternate macro-and-micro data is made a part of the decision making.
Loan-restructuring requests can be serviced in the following ways:
1. Customer approaches the bank for restructuring:
a. Request lender for restructuring by logging on to the website or mobile app form (validity limited as per RBI timelines) for such requests
b. Request through emails or calls: Customers are directed to a mini form that captures customer request to restructure loan
c. Show updated details: If customer is already pre-approved for restructuring, then show updated details, otherwise request for alternate data
d. Verify details submitted by customers and communicate decision
2. Banks/NBFCs approach eligible customers
a. Identify customers eligible for restructuring
b. Share SMS/email link with customers to fill form and alternate data
c. Verify details submitted by customers and communicate decision