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Non-performing loans (NPLs) are always an area of concern for banks where economic uncertainty persist, like in Europe. The NPLs’ impact on lenders’ profitability of is twofold: a net loss on loans not recovered, and an increase in costs as managing NPLs is extremely time consuming, due to paper-intensive workflow and an abundance of manual tasks.
A more industrialized approach may be required in the future to manage NPL volumes. And banks have the opportunity to extract more value than in the past, industrializing the operating model and adopting digital technologies across the value chain.
We have identified seven key initiatives to improve activity results:
- Client profiling. Better data means better risk-taking and client profiling. Combining information on financial assets and their financial and consumption behaviors can help to balance a high level of industrialization within a pre-defined set of actions for low-value clients and a bespoke approach for high-value ones, reducing costs and time to recovery.
- Define a retail strategy library to offer the best product to each client profile, combining data on customer behaviors, personal income and net worth.
- Redesign the operating model for corporate loans, developing a workflow management tool to facilitate collaboration between credit and commercial units. A better collaboration and integration across units can turn up to a 50 percent increase in the repayment rate (the number of positions with repayments on total position managed).
- Optimize legal services, adopting a value-based compensation model depending on the value effectively recovered. Legal expenses can be reduced by 20-30 percent, along with benefits on the overall recovery time.
- Launch a collateral recovery data quality program, leveraging existing information on collateral agreements and defining dedicated crash programs to improve the collateral data set to better address recovery strategies.
- Collateral management using advanced analytics to combine information on property value, collateral, borrowers, guarantors (i.e. valuation, auction information) to monitor unexpected depreciation. Better collateral management can reduce loan losses on collateral positions by 5-10 percent.
- Early warning and forward-looking models that leverage predictive analytics to improve credit portfolio quality can reduce portfolio deterioration by 30-40 percent.
With revenue generation still struggling, new competitors coming from digital, and regulation still to implement to maximize the recovery rate, adopting a better NPL management model will be more relevant than in the past. Industrializing recovery and collections functions through advanced portfolio governance models and adopting new end-to-end NPL tools can help to create value in a new area. Banks can’t underestimate the strategic relevance of NPL management and the benefits of shifting from a service unit toward a business unit approach with specific profit and recovery targets.