The start of Covid in South Africa saw many lenders taking decisive actions to deal with the impact this pandemic was expected to have on their lending books. This level of decisiveness, allied to informed and timely decision making, is key in managing credit portfolios and risk appetite decisions as we navigate our way through an environment that will be impacted for some time by the effects of Covid. What Covid has taught us is that the speed and broad impact this has had on the economy will force and has forced lenders into reconsidering their thinking on how they manage risk and state their risk appetites.
Covid has had an impact across the credit life-cycle, from changed dynamics relating to underwriting through portfolio management to the collections environment. This impact is so broad across an organization it is being seen as a competitive differentiator if managed correctly. The pandemic has offered us a glance into the future, where the need to manage credit risk immediately is likely going to be a critical success factor for most lenders.
Adding to the complexity is that while it was possible at one point to use broad indicators to define risk appetite, the fact is that we are seeing different speeds of recovery across different sectors and subsectors. This will necessitate new thought processes when considering ongoing risk management.
So what has changed and what will lenders need to consider when reviewing the risk in their portfolios and when re-assessing their risk appetite statements? Six important issues need to be highlighted:
Robust and structured forecasting capability in a business as usual mode, with the flexibility and control to provide timely analysis under quickly evolving situations.
Multi-level stress testing processes where being able to test at a sector, sub-sector or even regional level is likely to become the norm rather than the more traditional stress testing where a one size fits all is used at the portfolio level.
Risk management processes need to be simplified, allowing for more meaningful understanding, collaboration and input across all levels and functions within an organization. To allow for risk management to be a meaningful process it needs to be accessible to all in an organization, not just the risk practitioners.
Data and model management can be considered as never being more critical than now. What is particularly important for organisations is to be able to get useful information to the right people (those people who actually need it) and at the right time or at least available when they need it.
People, in a fast-changing, complex world processes and data can take you only so far. Having the correct skills, not just pure technical skills, but skills where people have the ability to think differently and challenge the norm is critical. The question that every lender needs to ask itself is how do they develop and enhance such a culture?
Finally, the role of digitization and AI can never be too far from any lender’s thinking. Automating repetitive tasks is no longer the ticket to the game, being able to identify tasks higher up the complexity chain for automation is becoming more and more critical. Critical not just for advantage but possibly even for survival.
It is important for organisations to understand that if risk management and risk appetite settings are to be meaningful then this process needs to deliver information that can be quickly and easily used by all individuals in the organization. It needs to be available in a format that can be and easily understood and that will help employees make quick, informed and intelligent decisions.