What’s your assessment of the Covid situation in terms of challenges and opportunities presented?
Within the last two months, the COVID-19 pandemic has sent the world into a panicked frenzy. There have been several reports on the unprecedented impact on the global economy and organisations like the UN have revised their original prediction from 2.5 per cent growth rate to a de-growth in 2020 as a fallout of the pandemic. Government and regulatory bodies, global organisations, private players, and even banks have not been spared from the devastating impact of COVID, and are now running overtime on disaster recovery and damage control.
Black swan events – natural and man-made – pose significant challenges to the economy and the way we function. For one, predicting them accurately is, at present, next to impossible, regardless of the technologies we have at hand. However, technology-led interventions can play an important role in managing the adverse impact such events have on the credit risk profiles of banks and financial institutions. Early Warning Systems (EWS) and Model Risk Management are two such solutions.
At its roots, every challenge brings with it an opportunity of some sort. If anything, the Covid situation has demonstrated the resilience of the business community. Even in the midst of unprecedented chaos, we saw the emergence of new or improved business models that solved a fundamental business challenge or problem. Some of these innovative businesses that thrive in the management of Covid-led disruptions are expected to continue into the new normal, changing the way we function forever.
How Early Warning Systems can be used to keep a close tab on companies and industries, and their associated credit risks to the financial sector?
In the event of a global-scale disruption like Covid-19, Early Warning Systems can help credit risk management professionals with tremendous insights to identify and flag risk-prone areas. Being advanced, near-real-time technology interventions, their analysis stems from an exhaustive combination of internal and external parameters, such as the industry, geography, customer-behaviour and other associations, eliminating any concerns of accuracy in prediction.
Early Warning Systems can capture critical information from a bank’s internal sources as well as extensive data from external sources, giving bankers early indications of stress, so the pre-emptive action can kick-in. For instance, fluctuations in collections from debtors would be quickly reflected in the turnover of an account. EWS, which continuously monitors account turnover, will use metrics-driven information, such as debit/credit summation ratios, to identify if the account is stress prone.
Similarly, it can extrapolate on external data points, where the indicative parameters would include credit ratings, consolidated information on loan portfolios and past dues from other financial institutions. Based on these holistic information sources, EWS will issue warning signals, alerting authorities of abnormal fluctuations and potential stress-prone behaviour in the account.
How various technologies can be used to mitigate credit risks associated with COVID-19?
We discussed how EWS can help monitor the financial health of borrower accounts to a good measure of certainty, even in unprecedented scenarios. Another area where technology can ensure the identification and continuous measurement of credit risk with good certainty is in the management of model risks.
The banking industry relies on a multitude of financial models to avoid risks and keep operations running profitably. These complex models, generally built on an impermeable algorithmic foundation, are prone to certain unintended biases or “model risks”. For instance, extreme events such as Covid-19 are not usually factored into the models, owing to the fact that they are infrequent and almost impossible to predict. An attempt to fit the model to such events could result in inflexible models, which are not of any use in the practical sense. This constitutes a type of model risk.
A technology-led framework for Model Risk Management can be used to effectively contain or eliminate model risks. An indicative use-case would be in model stress testing and scenario simulations, where technology can play a part in eliminating or controlling model risks. They can also enable an organisation in setting up a strong model management framework, which includes accurate controls and calibrations, and this can eventually lead to sound financial health of the lender.
In a post Covid business environment, what are the best practices that you see emerging? How do BCT Digital’s offerings complement?
BCT digital comes with a suite of robust risk management solutions catering to various risks like enterprise-wide credit and market risks. We have been continuously investing in product development efforts, taking proactive measures to understand the requirements of banks and financial institutions in the current scenario and build custom solutions to address these challenges. We are also continuously scanning the economic environment for fresh developments and taking stock on how they could potentially impact our customers.
For instance, rt360’s EWS module comes with real-time web-based early warning system capabilities to proactively identify stress or fraud in credit portfolios. Credit monitoring is an integral part of the lending activity of financial institutions, and as the economy is going through an unprecedented crisis, banks should adopt a proactive credit monitoring approach rather than the existing reactive approach. A preventive system is the need of the hour. Our EWS solution for effective credit monitoring consists of real-time monitoring, reverse feedback, and statistical capabilities to discriminate good borrowers from fraudsters or defaulters. These elements function on a foundation of a robust reporting structure and effective integration with multiple data sources – both internal and external.
Recent developments have given rise to the need for advanced risk management capabilities. Poor risk management capabilities and data quality have a direct impact on the bottom line of a firm. There is a need for better integration of risk with the core business processes of a firm, driving adoption of enterprise risk management systems. In response to the Covid crisis, regulators across the globe are recommending the organisation to include business continuity planning (BCP) in their risk management and business models, to ensure that if a catastrophe occurs, operations and services will not be disrupted. rt360’s Enterprise Risk Management Solution (ERMS) is a comprehensive solution, architected in a modular fashion, to cater to the varied ERM requirements of an organisation. These include operational risk, RCSA, KRI, compliance management, BCP and third-party risk management.
In order to optimise costs, banks and financial institutions have started relying on hybrid infrastructure, the right blend of on-premise and cloud-based infrastructure. BCT digital’s offers both cloud and on-premise deployments, depending on the requirements of the bank.
From your organisation’s perspective, how has your team been supporting customers during the lockdown period?
The Covid-19 pandemic has posed a very real threat to the Indian economy, its financial markets and people. At BCT Digital, we prioritised employee safety above everything else. One of our first responses was to enable employees to work from home, retain a positive outlook and stay productive. This was paramount to ensuring business continuity amid the wave of disruption sweeping the globe. Our early action ensured that BCT teams were fully functional and supportive of customers, right from day 1 of the country-wide lockdown. We have been able to carry on with our routine operations on account of robust business continuity measures, such as access to client environment through secure VPNs.
A highly effective technique was using collaborative platforms, like Microsoft Teams, to keep motivation levels high, track routine activity and manage feedback. Breaking down deliverables into smaller tasks, keeping timelines realistic, and maintaining open and proactive communication throughout the day, were among the other best practices we followed. Our team demonstrated high morale across the departments to ensure customer needs are fully addressed, by connecting for online product demos, online end-user training, and frequent calls.
Over and above, we have been proactively reaching out to customers to ensure that their requirements are fulfilled. In selected cases, we have been even visiting the client premises after taking due permissions to ensure “business as usual”. We made sure that the personal connect was never missing from the equation – be it to our people, stakeholders or customers. Interestingly enough, all of the effort paid off; our productivity levels and customer satisfaction have remained high and stable throughout the period.
How are you realigning your strategies with the “new normal”?
Banks and NBFCs are likely to see a spike in their stressed assets portfolio, due to economic slowdown amid the corona virus pandemic. Exposures to retail, aviation, hospitality, tourism, and related industries, will see a downward trend in terms of asset quality and increase in credit cost.
The Indian banking system is already encountering stressed assets in corporate sector. Of late, banks have moved their exposure from corporate to retail. The RBI’s three-month moratorium from March to May 2020, to defer the borrower’s debt obligations on term loans, came as a welcome relief. However, retail and micro credit (SMEs) have witnessed a huge hit, and banks are likely to witness a series of defaults in these portfolios. Furthermore, the RBI has asked banks for excess 10 per cent provisioning as contingent towards stressed sectors or on exposures that are availing moratorium. This will place increased stress on the P/L of banks.
BCT Digital’s rt360, digital offering has been realigned to cater to the business requirement of banks and NBFCs considering the current economic changes in light of the pandemic. For instance, rt360 EWS has been realigned to offer the following core capabilities, which draw on advanced technologies to enable banks to improve their asset quality in the long term.
- Real-time integration of EWS with banking systems, to enable a preventive approach to identify stress or fraud in the portfolios, as opposed to the current reactive or detective approach
- Reverse feedback adapter to harness the power of EWS across various internal processes, like rating reviews, underwriting and so on
- Specialised retail and SME analytics for predicting stress.