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.
As we emerge from the crisis, a spike in non-performing loans is inevitable – both from those firms damaged by the pandemic itself and businesses whose pre-existing distress has been masked by government support.
So which approach should banks adopt as they seek to recover these loans? In truth, solutions should be as varied as the lending institutions themselves. One size certainly does not fit all.
Bespoke solutions are required
A wide range of options can be deployed, from the bank hiring its own additional collections professionals, to third-party outsourcing, debt sale and carve outs of portfolios or parts of the business.
Support from additional third-party to cope with a spike in non-performing loans has the advantage of immediately adding skilled professionals with access to leading technology to a bank’s recoveries effort, improving profitability and delivering an excellent customer service experience.Stanislav Krasnodemskyi, M&A Director at Intrum.
Some banks may choose to upscale their existing operations. However, this is problematic, redirecting time, investment and other resources from the core business focus. It is difficult for in-house teams using legacy systems to match the efficiency needed with such high volumes.
Most will require additional third-party support to cope with a spike in non-performing loans. This has the advantage of immediately adding skilled professionals with access to leading technology to a bank’s recoveries effort, improving profitability and delivering an excellent customer service experience.
In addition, some banks may choose to combine third-party support with the sale of existing stock, removing defaulted loans from the balance sheet. Baltic Bank Snoras worked with Intrum to find a solution to a EUR430m NPL portfolio consisting primarily of secured SME claims. This involved the formation of a purchase consortium as well as servicing capability.
Carve out capabilities
A further step is to carve out the SME servicing unit from the bank. For example, Intesa San Paolo, which has the largest SME loan market share in Italy, combined a EUR20bn servicing contract with a EUR12bn portfolio sale and a 600-employee carve out, retaining a 49% share in a new legal entity with Intrum. This led to a EUR400m book gain for the bank, cost reductions and more efficient recovery.
Meanwhile, Greek bank Piraeus conducted a similar combination of solutions on its EUR28bn NPE book, seeing a boost to its capital ratios, EUR50m of net cost relief in the first two years and the expectation of at least 10% improvement on its existing NPE reduction plan.
Taking an individual approach
These are significant scale projects that may not be appropriate for all lenders. Solving the SME non-performing loan spike will require an individual approach rather than an off-the-shelf solution.
Ultimately, banks require partners with expertise who are prepared to take a bespoke approach. That may be through simply providing extra pairs of hands for a period of time, or through a combination of servicing, debt purchase and carve out capabilities.
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.