An effective NPE strategy is crucial
A holistic strategy will allow banks to develop the capabilities and partnerships they need. Faced with these hurdles, banks need proactive, joined-up non-performing exposure (NPE) strategies that cover every aspect of NPE management and allow for effective prioritization. Strategies must not only cover portfolio review and decisioning, but also the resulting implications for capital ratios and risk-weighted assets, operations, human capital and customers.
As they design their NPE strategies, individual banks can draw on the sector’s experience of deleveraging over the past decade. One key lesson learned was the importance of early recognition for problematic exposures and of early customer engagement. Another was the need for a clear decision-making framework that integrates financial, conduct, operational and capital considerations.
When it comes to disposals, experience shows that in-depth knowledge of the distressed debt ecosystem is vital. That includes understanding typical transaction structures and creating panels of potential investors. Banks should also build dynamic relationships with loan servicers and other specialized service providers, harnessing their capabilities in areas such as valuation, market sounding, due diligence, transaction structuring, tax advice and deal execution.
To implement their NPE strategies, banks will need a range of core capabilities. We have grouped these into five complementary and connected areas as follows:
- Customer relationships:
Understanding changing customer needs, communicating clearly and providing enhanced digital experiences where possible optimizing collections while ensuring fair customer treatment and avoiding harm.
- Portfolio management:
Building robust management reporting frameworks that quickly triage loans into categories ready for additional financial support, restructuring, work out or disposal. That includes applying reliefs, monitoring eligibility and affordability in real time, identifying covenant breaches and preparing for non-performing loan disposals.
- Stress testing and provisioning:
Analyzing the impact of macro and micro indicators on creditworthiness, modelling economic scenarios, calculating expected credit losses under IFRS 9 and calibrating asset write-downs and impairment charges.
Preparing people, processes and technology for new conditions and higher workloads. That includes mobilizing and training scaled-up teams, implementing automation where possible, adjusting workforce KPIs and partnering with third-party servicers.
- Transforming collection and recovery:
Using digital technology to transform the efficiency of collections and recoveries. That might involve using decision support to ensure consistent treatment or warning customers with digital EWIs. New technology can be integrated into legacy systems or banks can opt to implement clean end-to-end platforms.
Looking further ahead, banks should think creatively about maintaining customer relationships while optimizing NPL management. That might involve sharing loan restructuring with individual investment funds or securitizing sub-performing loans – which could be made easier by exceptionally low yields. Innovative approaches will help banks respond to industry restructuring and begin pivoting towards a post-COVID world.