Credit Management in Australia - January 2021

Credit Management

Where to from here for Credit Risk Management?

By Nick Jenkins*

Collection teams and risk managers face the prospect of challenges ahead as the COVID-19 pandemic continues to drive changes to the credit environment, customer behaviour and the global economy into 2021. The next six months are expected to bring continued economic uncertainty resulting in possible significant challenges with delinquencies and loan defaults.

In this ever-shifting landscape, real-time data and analytics are proving their value in helping organisations and customers find a quicker path to recovery. Dynamic, agile risk tools and machine learning techniques can be highly effective in delivering a closer profile of customer risk and vulnerability for informed decision making.

If COVID-19 has taught us anything, it’s the importance of acting on fact, not on assumptions. For lending institutions, this means harnessing external data sets as a means for making timely, proactive decisions. Without the ability to

augment traditional financial dataand conventional assumptions withnewer high-frequency informationand behavioural insights, creditrisk management may becomesignificantly harder in the challengingtimes that lie ahead.

From deferrals to? As the home loan deferral periodends, customer communicationstrategies should be updated usingreal-time insights to enable tailoredand fair outcomes. While manyborrowers have transitioned backto normal contractual repayments,a substantial number are flaggingvulnerability still needing paymentdeferral programs. As of lateSeptember 2020, 7.4% of totalhousing and 10.8% of SME loansremain on payment deferrals (Source:APRA) at a value of $168 billion.

For some customers, this might bethe first time they have experiencedfinancial insecurity, and they will belooking to their lender to understandtheir needs and provide personalised

Nick Jenkins

“If COVID-19 has taught us anything, it’s the importance of acting on fact, not on assumptions. For lending institutions, this means harnessing external data sets as a means for making timely, proactive decisions.”

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Credit Management

debt restructuring solutions. Equifaxanalysis shows that borrowers agedbetween 36 to 45 years are amongthe most vulnerable, with the highestnumber of mortgages in deferral (asof May 2020). Borrowers from touristdependentQueensland regions andouter-Melbourne estates are alsograppling with a higher proportion ofdeferrals compared to the nationalaverage.

Quite commonly in a period ofcrisis we see a direct correlationbetween borrowers with low creditscores who need longer deferralsthan those with higher credit scores.Borrowers in the lower score bandshad the largest increase in the rateof deferral from May 2020. Accountsexiting deferrals have higher scoresthan those entering or remaining indeferrals experiencing lengthenedcredit stress.

Property market boom or bust The residential property markethas defied expectation by

“The residential property market has defied expectation by showing resilience in the face of the pandemic. Mortgage demand remained strong in the September 2020 quarter, and house prices in Australia/capital cities experienced a 0.4% rise in October.”

showing resilience in the face ofthe pandemic. Mortgage demandremained strong in the September2020 quarter, and house prices inAustralia/capital cities experienceda 0.4% rise in October (source:CoreLogic). While refinancersinitially drove demand, governmentstimulus measures have encouragedan increasing number of first homebuyers into the property market.

The high-end of the residentialmarket has grown substantially inmajor Australian cities and acrossregional areas. The pandemic haschanged the perception of what

people need from their homes, withmore people seeking a desirableenvironment from which they can liveas well as work.

Increased use of digital channelsWorking from home dynamicsare also changing the waycustomers communicate withfinancial institutions. There is agreater need for digital channelcontact, executed in a way thatrespects borrower preferencesand suitability. Applying digitaltechnology to collections is crucial

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in efficiently addressing the challenges of rising delinquencies.

Delivering on customer experience also requires an understanding of the mentality of consumers living through a crisis. Fear of the unknown can bring on a scarcity mindset, this means short-term decision-making overrides and sense of future impact. Helping customers understand and manage their financial situations for the short-term and long-term, benefits everyone in the equation. Constant communication with customers can help borrowers to behave differently and not make uncharacteristically poor decisions.

With no end date to this pandemic, there is a considerable way to go before customers return to pre-COVID-19 information processing and decision making. Using factual

data for validation rather than relyingon old norms will help identify thesevariances in borrower behaviour.

A future full of variables As 2021 unfolds the only constantwill be change, and the creditindustry may be susceptible to manydifferent economic variables. TheGovernment Stimulus has highlyinfluenced outcomes so far forfinancial institutions giving a senseof security. As we move into a moretargeted focus in Fiscal Policy anda high dependence on a Covid-19vaccine, the underlying vulnerabilitieswill start to surface with challengesmore evident.

There is no silver bullet to dealwith these uncontrollable variables.Collection teams and risk managersneed to be flexible, prepared and agile

enough to move with their customers.A robust well-thought-out approachto credit risk management and debt

collection is essential.Resilience to the ongoingdisruptions of the COVID-19 crisisrequires pertinent data and advancedanalytics to replace assumptions andfill gaps in existing knowledge. Thefuture of credit risk managementis knowing your customer, keepcommunicating with them andknowing where to look to predictcustomer needs more efficiently andwith greater empathy.

*Nick Jenkins Debt Services Solutions Consultant Equifax T: +61 427129852 E: nick.jenkins@equifax.com

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