Some analysts and government agencies have pointed out that the worst situation for the banking industry has passed. eINSIGHT talks to Manu Panda, Principal Consultant, Global Consulting Team, Experian about the future of consumer finance market and what can help retail banks to survive and thrive as the economy emerges from recession.

How severe is the situation with delinquency in Asia Pacific as compared to the US and the UK today? How do you foresee the situation in the region in near future?

We are probably lucky that we have not witnessed the same levels of delinquency in the Asia Pac markets as compared to the US or the UK.

Back in 2006 in the US, mortgage defaults were triggered as a result of a downturn in property prices. Banks with financial instruments linked to sub prime assets took huge write downs. This led to a drying up of wholesale funds in the interbank market besides pushing up the cost of borrowing. Soon enough, we were faced with a full blown global recession, fears of deflation and depression with many high profile businesses going into administration. Continued weakness in economic fundamentals including high unemployment rates has meant high delinquencies in the US and the UK. Global Rating agencies expect credit card charge-off rates to exceed 10% by the end of 2009 in both the US and the UK from the 5% levels at the end of 2007.

In Asia Pacific, we have seen increase in delinquency levels but they are nowhere close to the levels seen in the UK or US. We have not had the same issues as these markets. Our exposures to subprime assets in the US have been limited. We have been impacted by the global recession with export driven markets like Singapore, Japan, Korea and Taiwan the hardest hit. But timely government interventions in most of the markets through economic stimulus packages have helped manage the recession better than previous occasions. Besides, we have not seen the level of high unemployment as seen in the US or the UK.

Looking forward, sustained global economic recovery is still some distance away. The pace of GDP decline is falling in most of the markets in the region, but we will still see negative year-on-year GDP growth for most of Asia excluding China and India for 2009. Until the economy in the US and the UK recovers, we are unlikely to see the economic fundamentals strengthening in the Asia Pacific markets although China and India will continue to grow at healthy rates. Portfolio delinquencies and charge-off will continue to remain high and will be closely watched.

What major quality changes are happening in the credit policy of retail banks?

We have already witnessed a general tightening of the credit standards in response to the financial crisis. Banks are not willing to lend as much and to as many customers as they did before the crisis.

Credit policies will continue to be restrictive and regulated - especially in the sub prime segment. As lending volumes shrink, revenues will continue to be under pressure. Margins may improve as a result of higher lending cost, but they will be offset by higher costs of compliance and control. Overall profitability will be impacted by higher credit and capital costs. Under these circumstances, banks will be more selective in choosing new customers and will shift their focus to increase returns from existing customers.

How will retail banks prioritise their needs in credit risk management, debt management and fraud prevention under the current environment? Why?

Faced with increased bad debt levels and delinquency, the top priority will be on debt management. Banks are increasingly looking into refining and optimising their collection strategy and process.

Other major areas will be Credit Risk and Fraud Management. When more people are out of their jobs, more of them will be thinking of beating the system to make a quick buck. Therefore fraud activity could be on the rise. Banks will see the need to beef up their Risk Management infrastructure, but getting funds to make new investments will be hard. So while they will be selective in making such investments in the short term, banks will look to get the maximum out of the existing tools such as scorecards or decision systems.

Further, with increased focus on compliance, there may be regulatory pressure for some systems - such as Basel and Anti Money Laundering - which may be the basis to prioritise some of their investments.

How does scoring come into play when banks strive to mitigate delinquency and fraud risks?

Credit Scoring has become a basic risk ranking tool that most banks employ. However, there is still limited awareness of the relevance of the credit score, and how to use it effectively.

In general, most banks use at least an application scorecard for account acceptance decisioning. The effectiveness of a Credit Score, however, depends on how well it is used. For instance, an application score at the time of processing a new application could be used for more than simply making an accept/reject decision. It could also be used to decide the amount of loan, rates to charge, lending terms and the most optimum credit processes (involving Verification, Fraud & Credit Bureau) and hence costs.

It is important for banks to review their use of a Behavior Score. The use of such a score is generally limited to Credit Line management decision process. The score developed is often product centric using behavior data from a single product as opposed to data from across products. A true Customer Behavior Score that uses a customer’s behavior data from across products is much more powerful.

A behavior score is typically available once there is some performance history on a credit product. It can serve as a useful tool when deciding account management actions such as credit line management, cross sell decisions, pay or no pay decisions. A Behavior Score used for Collections helps decide the right Collections strategy to reduce bad debt levels and overall Collections costs.

There is limited use of fraud score in Account Origination and Transaction Management in the region. A fraud score identifies potential frauds - either application or transaction - by analysing data patterns. The challenge is how to use it effectively to keep the false positives low. A successfully fraud prevention strategy of course involves not just fraud score. A combination of the right fraud system and the right containment action determine the success of a fraud management program.

Can you share some of the best practices for deploying an effective credit risk management system?

An effective credit risk management system is one that uses data to create a customer view of risk by using multiple sources of Information. It is one that is scalable and flexible and provides for objective control by providing the ability to deploy and change rules proactively and helps automate decisioning.

When it comes to deploying the system through effective re engineering, banks need to address several things. First, creating a vision and strategy for change should be on top of the agenda. Second, identify key processes to be consolidated and streamlined into a solution. Third, adopt a top down approach, create a business case to get buy in and rally support. Finally, have an effective change management program in place.

Increasingly, banks are looking at systems that deliver a flexible modular approach to meet changing business requirements and foster greater innovation in business process, product offering and choice of service partners.

Author's Profile

Manu has over 14 years of experience within the credit industry across several markets in Asia Pacific and the UK covering portfolio risk management roles for global banks and financial services companies. His experience includes portfolio management, risk analytics and systems/project implementation for Credit Cards, Personal Loans and Mortgage portfolios in India, SE Asia, Hong Kong, Korea, Japan, Australia and UK

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