The COVID-19 pandemic is creating new challenges for societies and economies on an almost unprecedented scale. The knock-on effects of the virus are seemingly endless.
Banks are at the front-line of the economic disruption. Suddenly they are having to deal with issues that simply weren’t on the horizon a few weeks ago. They are being almost overwhelmed with inquiries and applications for support from both personal and corporate customers.
With so many business sectors severely challenged – and in some cases facing a complete suspension of business – the demand for business loans and financing is immense, particularly for Small Medium Enterprises (SMEs).
Governments around the world have launched significant support packages for small and medium sized businesses, often guaranteeing all or most of the credit being made available. But of course, it falls to the banks to actually administer and originate the loans.
Banks are pulling out the stops to do this, but it is significantly stretching their capacities. They are faced with a difficult balancing act between making credit available quickly, and performing the checks that are needed.
The whole situation is presenting banks with a number of risks that they are having to manage at almost breakneck speed.
Firstly, there is operational risk. Any bank whose systems fall over or is perceived to be slow to process applications faces a potential backlash and bad press. But with the number of applications and contacts coming in – not only from corporate customers but from personal customers too – this is no easy matter. There are signs of the strain systems are coming under, with some application portals advising customers to try again later, while call center waits are far beyond normal service times.
This operational risk leads into the second area of reputational risk. At a time of such pressure, customers will likely remember how they were treated. Those who receive fast service and effective turnarounds are likely to feel a deeper loyalty and positivity about their bank. But for those customers that experience frustration and delay it will be the reverse. How banks manage now, and how well their systems stand up, could have long-term implications for future customer relations.
However, processing the loan applications is not simply a matter of administration. There is a regulatory and compliance risk that needs to be managed too. Although governments are guaranteeing most or all of the loans, banks are still required to gather certain documentation and validate it. If they don’t do this appropriately, then they could be exposing themselves to liability risk. In most cases, the businesses coming to them will be existing customers so the KYC (know your customer) checks should already have been carried out. But banks need to refresh these checks every few years, depending on the risk category of a customer. For some customers, there is a risk of relying on KYC checks that haven’t been refreshed. Due diligence can’t be sacrificed for the sake of speed. It’s a challenging proposition.
The fourth risk relates to forbearance, and is tied up with the regulatory risk. In many countries, governments are guaranteeing the loans made to small businesses, but this may only be up to a certain threshold, leaving banks exposed for the rest. Where some governments are guaranteeing the whole sum, there are certain conditions attached. For example, in the US, under the CARES’ Paycheck Protection Program, loans will be completely forgiven as long as at least 75 percent is used to meet payroll costs and the residual amount is for essential expenses to keep the business going such as paying utility bills or leasing costs. Banks, therefore, need to validate that these criteria are being met.
Right now, banks are completely focused on the origination of loans and managing the volumes of requests coming at them. But if they don’t handle the process appropriately, we could see forbearance and liability issues surfacing further down the line.
It is a challenging time. Banks have never had to deal with anything quite like this before. Their value to the functioning of economies has probably never been clearer. But the stakes have never been higher either. Getting it right while meeting the short term financial needs of the SMEs is everything.