The Covid-19 crisis is having a significant impact on the economy, including the payment options of debtors and bill-paying customers as well. In connection with this, at the end of March the Hungarian Government published two decrees restricting certain enforcement measures and (coercive) acts used in enforcement proceedings, and the auctioning of real estate by natural persons, furthermore also prescribes a ban on the eviction from these properties for the duration of the emergency. Economic and regulatory changes may affect several sectors.

Impact on the debt collection services

New legal and economic changes are also important for the operation and process of the sector, but their impact is different in the short and medium term. Changes in enforcement procedures and order for payment procedures (for the duration of the emergency), as well as significant negative economic effects (especially rising unemployment), may make it difficult or in some cases restrict the ability to enforce claims. On the other hand, unfortunately the Covid-19 crisis will increase the volume of overdue loans and utility bills in the medium term, creating new business opportunities for debt managers, especially after the payment moratorium.

Based on the above, in our opinion, it is worthwhile to separate the short-term and medium-term goals of the institutions involved and the tasks and tools required for this:

• The primary task should be to ensure the continuous operation in accordance with the business continuity plans, including in particular the appropriate IT infrastructure and staffing (e.g. the use of separate, shift teams, the use of work from home).
• In the short term, it is worth choosing the debtors against whom the currently applicable collection processes can also lead to good results. To this end, it is worthwhile to introduce effective and efficient decision support solutions to help decision-making with quicker, simpler statistical modelling.
• Overdue debts may increase significantly in the medium term, so it may pay-off in the future to take advantage of the time available to prepare. During this time, it is worth reviewing the collection processes and methods, implementing new solutions supported by automation, digitization and statistical modelling, because this way the efficiency and effectiveness of the company can be greatly improved even with increasing workload in the future.

Impairment models

Bank impairment models typically consist of several components driven by different risks. One of these is the loss given default (LGD), which is based on the difference between the exposure at default and the returns from customers. Returns may include, for example, proceeds from enforcement proceedings or the sale of collateral. In many cases, banks choose to sell the receivable rather than take certain collection steps, and the purchase price of the receivable is a return to the bank. A debt collection company then carries out the collection and, in many cases, initiates enforcement proceedings.

The new government decrees affect banks' return opportunities in different ways:

• • Although enforcement proceedings can still be initiated against certain measures applied in enforcement proceedings, the restriction of (coercive) acts may affect the efficiency of collection managers, which was described in detail in the previous chapter. The instalment payment options offered for existing, ongoing enforcement proceedings have a similar effect. This may result in offering a lower purchase price to banks for each of their non-performing loans, thereby reducing the bank’s return on receivables sales.
• In some cases, banks themselves initiate enforcement proceedings against their customers, hoping for returns. During this emergency situation, these procedures can also be carried out with a number of restrictions, thereby reducing banks' short-term income from them.
• The ban on the eviction from residential properties for the duration of the emergency can reduce the return regarding this receivables.
• Therefore part of the revenue from the debt collection is shifted by a minimum of the duration of the emergency. During the calculation of impairment and the estimation of LGD, not only the amount of recoveries, but also their timing must be considered, we must also take into account the time value of money. In practice, therefore, the expected return of the bank decreases not only due to the decrease in the purchase price of receivables sales, but also due to the time lag of the returns.
• The above measures may also have an impact on the behaviour of clients, as if a client who is no longer performing is informed that, for example, their property cannot be evicted or their property cannot be auctioned, the volunteer's willingness to pay may decrease (moral hazard).

Given that historical data relevant to the situation related to the emergency is not available, the LGD estimate cannot be changed on a purely statistical basis, expert forecasts and corrections may be required in the short term.

Similar to bank’s impairment, the decline of the debt’s purchase prices may also be reflected in the impairment models of the telecommunications and other service sectors, due to the fact that they can only sell their non-performing exposures at a significant discount.