Echoing the words of a report by Deloitte titled “COVID- 19 Potential Implications for the Banking Sector and Capital Markets: Maintaining Business and Operational Resilience”, we do not know the long-term implications of COVID-19 for financial markets, banking and capital markets, but when normalcy returns, banks and capital market firms will likely have learnt a few lessons. These may include how to best retain operational resilience when confronted with future pandemics and possibly how to design new operating models such as alternate work arrangements.
COVID-19 may further accelerate migration to digital channels and connectivity. More importantly, a critical test has been placed before banks and relevantly our local banks. As clients navigate these troubled waters, only banks that are closer, supporting and standing side by side with the customer, understanding what they are going through and offering support, will be the biggest winners. Banks cannot be under the illusion that all will be well without lifting a finger. Major shifts in almost everything will be required with the overall objective of ensuring that all stakeholders are taken care of and the way we do things to accommodate our customers.
Continuing with the series, the banking industry needs to re-look some of the things and adapt in order to remain relevant during and post COVID-19. Other than CSI initiatives, internationally we have seen some banks also acting as responsible citizens by extending loans to hard-hit borrowers and renegotiating credit terms to more less stringent and flexible terms. As Demirguc-Kunt et.al in a research paper published in 2020 titled “Banking Sector Performance During the COVID-19 Crisis” noted, many governments have also encouraged banks to continue providing credit, in some cases incentivising them to draw down their buffers. Whilst this time banks appear to be part of the solution to the crisis, the banking sector has also been hard hit by the rapid increase in the amount of credit losses and an extended uncertainty on the credit environment and duration of the crisis.
The antidote in banking is the flow of money and that is what ensures we remain in business, be it transactional activities (in branch and via digital channels) to boost non-interest income, credit facilities or deposits from both our retail and institutional clients, money has to flow in and out. We unfortunately now find ourselves in a situation whereby both ourselves and our clients are in an unusual territory, the flow of money is now stifled, our economy has contracted and will contract even further as the situation is not improving. Until convincing help arrives, we are all sinking into panic mode. Clients are experiencing stressed financial conditions, their credit ratings affected and more will be affected, and pledged collateral may experience a decline in value. Detrimental to any financial institution that gives out credit facilities, both retail and institutional clients may resort to minimal, delayed or no payment at all on their credit facilities.
The pertinent question therefore remains, what can banks do to help? The problems affect the entire value chain and eco-systems. Banks are experiencing asset quality problems and there is a decline in credit growth. Assets largely refer to credit facilities which are normally given to clients and in turn a client’s obligation is by way of periodic instalments or a lump sum payment depending on the agreement with the bank. For an asset to qualify as good quality, a client should be able to honour obligations as agreed. Asset Quality problems then arise when obligations are not met and the customer defaults in terms of payments. The bank therefore sits with a loan book marred with debentures that are not being serviced well. Ultimately, financial institutions will have no choice but either to write off the debt, depending on the amount, or to take possession of the asset it has financial interest on.
Banks can best assess and proactively work with the client who may be affected to renegotiate loan terms and conditions. Loan terms and conditions are usually given to clients with the ability to meet the conditions at the time and the main factor is affordability and other factors applicable. We are now confronted with a situation where some clients experience loss or reduced income and can no longer afford to meet their obligations. Unfortunately, these are no delinquent clients but have been forced into the situation. Banks are never in favour of pursuing legal actions to recover their monies. However, they are ultimately forced to take that route as the last resort as per credit policies. Therein lies an opportunity to find a solution as a collective and working with the client to pursue such. The credit policies can also be relaxed, given the situation and afford the client some breathing space. This usually leaves the client in an even more difficult situation. As bankers, we unfortunately cannot still apply the same parameters we were using pre COVID-19 because our clients would become more frustrated.
There is certainly reduced growth, and it makes sense since most people and institutions may not have the muscle to take debt. Banks are also restricting their lending appetite and closing out those who would have ordinarily qualified for such loans. Both then lose out. Perhaps banks should also not avert the risk that much and make a few exceptions to accommodate by relaxing the very same appetites. While doing this, banks can also increase their loan loss provisions as the rate of default will certainly be higher. If the loan book is closed out completely as a conservative approach, the bank’s income streams in facility fees and interest income will be compromised and be reduced.
The critical page to pull out as bankers is the fact that clients will certainly never forget the experience we dished out as financial institutions during the COVID-19 era. More than before, we need to step up as bankers and be more creative in providing meaningful solutions to clients as we open new avenues, be it products or services. Some banks will emerge from this pandemic as preferred banks or more customer-friendly, unfortunately for some, the fortunes will be different and they will have themselves to blame and no one else.
I live by the code of being a banker for all seasons and clients need to know we are always there to assist, guide and advise regardless what they go through.
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