SME loan recovery – six challenges facing banks
The unprecedented scale of lending to small and medium-sized businesses to keep them afloat during the pandemic leaves banks with a significant recovery challenge.
As countries emerge from the Covid-19 crisis, lenders across Europe must now ensure effective and sensitive recovery of nearly EUR1trn lent to small and medium-sized (SME) businesses during 2020. Much of this credit is backed by government guarantee, meaning public money is at stake – an additional pressure to those charged with securing recovery.
According to Intrum’s annual European Payment Report, late payment is worsening as businesses feel the squeeze and SMEs are particularly vulnerable. Nearly half of SME respondents (46 percent) said late payment poses a risk to the sustainable growth of their business, while 37 percent said it is a threat to their survival.
Given this, the challenges facing banks are significant:
Resources:Many banks are not prepared for high volume collections. In the years leading up to 2020, defaults by SMEs were low. During the pandemic normal defaults have been suppressed almost entirely by government support. As a result, many lenders don’t have the capacity to deal with rising volumes of non-performing loans. Scaling up at speed will be difficult, requiring additional specialist personnel and investment.
Technology:Legacy systems can make it difficult for banks to collect effectively and significant investment would be needed to bring them up to today’s best-in-class standard. With huge volumes to be recovered, the advantage offered by cutting-edge technology and digital collections is a significant factor in efficiency, the customer journey and profitability.
Distraction:Management time, IT and organisational resources should be focused on winning new business and retaining existing clients. To thrive, banks will want to concentrate their product innovation, digitalisation and cost efficiency programmes on their core business rather than be distracted by collection and recoveries. Banks that choose to handle SME defaults alone will need to redirect valuable resources, slowing their progress in the market.
Volumes:The scale of the SME default challenge is not yet clear. Government support has enabled some companies to survive and continue but has also masked failure in others that would have occurred regardless of the pandemic. Depending on the speed of economic recovery and the twists and turns in the global health crisis, non-performing loan levels could vary dramatically. Either way, the volume of SME loans is such that even a small default rate poses a significant recovery challenge.
Balance sheet:Unless properly addressed, these challenges will impact a bank’s bottom line in the short and medium-term. Investment in specialised talent, data, systems and analytics would be needed, then would require restructuring when the spike is worked through. Historic experience suggests at least a 10% collections uplift when outsourcing to a specialist provider – making a key difference to revenues over time.
Customer experience:When in-house collections teams are squeezed, customer experience is threatened. Banks need highly-skilled professionals and processes to handle businesses facing all circumstances – from those in distress to clients getting back on their feet and others seeking to avoid repayment. A range of digital options and customer-centric approach is essential from an ethical and reputational perspective.
All of these challenges will negatively impact profitability if not tackled. It is important that banks have skilled partners who can help them design bespoke solutions that suit their individual portfolios.
How Intrum can help
As Europe’s leading credit management company, Intrum is a major servicer of SME loans. We are poised to support banks in finding solutions to their non-performing loans – from servicing to portfolio sale and carve outs. To talk to us about your requirements, contact us through the form below.
SME loan recovery – which is the best approach?
The Covid-19 pandemic has led to a large increase in the volume of lending to small and medium-sized (SME) businesses. ECB data shows that new lending to SMEs has topped nearly EUR0.9trn in the Eurozone countries in 2020, a significant proportion of which has been government guaranteed.