In the hope of strengthening customer relationships before the next market boom, many lenders have taken a proactive approach to dealing with customers struggling under the backlash of the recession, offering leniency on payment terms and allowing payment holidays. Although this may appear to be potentially the ideal solution for many facing short term difficulties, it allows those in debt to believe their accounts are under control and payments are sustainable; this is not always the case and the response by lenders has been accused of worsening the situation. Following investigation into this growing trend, the Financial Services Authority (FSA) have voiced concern*.
This has led to further negativity in the press and a pessimistic view towards lenders, fuelled by the claim that bad debt is rising. However are these concerns justified? Mark Keyworth, a qualified banker with extensive experience within the UK banking industry, shares his views…
One way in which lenders are attempting to help their customers is through the use of forbearance – a series of methods used to relieve financial stress on struggling customers. These techniques can be applied as a remedial action within Collections or more pro-actively on accounts that have not yet fallen into arrears. Under certain circumstances, such as a redundancy or a short-term illness, forbearance has been used to maintain a customer relationship by extending temporary help to those in need. In this instance, lenders are confident that while unable to pay in the short term, a customer has the ability, and is likely, to recover financially and repay their debt in full. The concern from the FSA and other industry bodies is that occasionally best practice is ignored, with lenders failing to take the long-term situation of a customer and what they can afford, into account. Under pressure to be lenient, lenders are making judgment calls based on insufficient or incomplete short-term information, leading to unsustainable payment terms and further financial difficulty for the customer in the long run. This is potentially made worse by the excessive operational use of forbearance in an attempt to clean up the delinquent portfolio.
From a customer management point of view, lenders are taking a more mature approach than ever before. Many are proactive; looking for signs of change in customer behaviour and circumstances, identifying stress periods, and understanding the individual’s situation with the long term view of keeping the relationship positive and on-going. Working with customers to help rehabilitate customers in difficulty by offering support can provide a positive experience which nurtures their loyalty, reaping its own rewards in the long run. A ‘risky’ customer today could be a profitable customer tomorrow if handled correctly, and nurturing existing customers is often more cost efficient than acquiring new ones.
So what has caused this issue to become such a hot topic? Concerns raised by the FSA relate directly to the way forbearance is offered to those that cannot sustain their debt, along with the lack of transparency of reporting throughout the organisation and of the regulators. Traditionally, forbearance has not been actively tracked, leading to over optimistic views of future bad debt levels and therefore potentially insufficient provisions applied for impaired lending. As a result, reporting and monitoring of forbearance has become a board level topic, so that members of the board can become more active in dealing with the number of active cases in their organisation and the long term ramifications on the P&L and Capital requirements.
In short, forbearance is nothing new but has gained exposure through increasing media coverage in the on-going uncertain times. With speculation around whether a rise in forbearance is simply postponing financial difficulties for many, lenders may feel they are caught in a Catch 22 scenario, facing problems whatever they do. However, regulators are clear that a forbearance strategy must not be used to mask further affordability problems for a consumer that is unlikely to resolve their difficulties in the medium term. Taking the time to fully understand the situation of an individual and extending forbearance where it is appropriate, with regular monitoring and review, has the potential to benefit both parties long term.
* The Telegraph June 2011
Mark is a qualified Banker and has extensive experience within the UK Banking Industry across the whole credit cycle at strategic and operational levels. His experience consists of direct portfolio P&L control as well as extensive consulting on the development of profitable and pragmatic solutions.
Mark’s experience has been obtained from a background of 13 years within the UK banking industry, 6 years within retail credit and 11 years working internationally in a consulting role.