Road to Recovery: A Strategic Planning Blueprint
As the debt forgiveness period winds down, concerns about what happens in the post-debt holiday period begin to emerge. Most financial institutions, including mortgage insurers, offered a three to six month deferral period to retail and non-retail borrowers. According to BBA’s research, an estimated 20% - 40% of the loan book exposure went on payment holiday as a result of the abrupt stop in economic activity.
Once a loan obligation goes into the payment deferral mode, the following are the likely paths:
- It gets cured and becomes performing
- It gets restructured and becomes performing
- It goes into default, foreclosed and recovery proceeding begin
Strategic action plans are needed to focus on loan book hotspots, development of forward- looking key risk indicators, timing and sequencing of remedial actions. A great starting point is to examine ‘going-in’ health of the portfolio, including rating grades/scores, collateral and recovery estimates.
We prepared the following checklist that can be used as the basis to develop a strategic action plan:
- Exposure
- Identify segments exposed to downside scenarios and if possible, cancel the undrawn portion of lines. At the very least, review the drawdown criteria, commitments, limit breaches and undertake steps to reduce unwarranted exposure
- Monitor and supervise large exposure, including sectoral and single name limits and reconsider hold levels
- Review loan acceptance criteria in the light of trends
- For vulnerable borrowers, re-examine policies for asset based lending
- Develop a robust plan for exception reporting, delinquencies, delays in reporting
- Defaults
- Identify downside scenarios and model the sensitivity of ratings/scores
- Benchmark and project defaults and expected credit losses and impact on capital under various scenarios
- Recovery and collection planning
- Review legal documentation and verify that the collateral insurance is being maintained
- Determine the eligibility and strength of collateral for post COVID-period
- Increase collection capacity and run collection fire drills
Future strategic plans, and therefore financial projections, must take a view on how the economy will recover, or not, in both the short and the long term to give confidence to all stakeholders. This involves a focus on ‘stay-in-business’ strategies for internal management while managing external disruptive scenarios on many fronts.
BankingBook helps clients assess the health of their loan books, develop recovery plans and ‘stay-in-business’ strategies. BankingBook’s ScenarioFrontier, delivered in an easy-to-use web- based front-end, provides users the flexibility to create customized scenarios, the power to analyze strategic plans, and the oversight to monitor performance.