Amidst a spike in demand for business loans, credit bureaus alone aren’t enough to get a full picture of an SME’s financial health. Banks and lenders need to draw on the multiple data sources available in the Open Banking environment to better assess credit risk and affordability.
In light of the ongoing pandemic, EY has forecast that business lending will grow by 14.4% this year. This represents a huge opportunity for lenders operating in, or wishing to enter, the unsecured SME lending space.
But they need to be careful. Credit bureau data is enormously helpful but in isolation is no longer sufficient to accurately predict credit risk in the post-COVID-19 world.
The UK government’s lending programmes, for example, aren’t consistently recorded by traditional credit bureaus, meaning that limit and loan calculations may take insufficient account of the requirement to repay these from May 2021 onwards. What’s more, when a credit default event occurs in a government programme, this isn’t recorded at a private credit bureau.
In addition, private sector lending programmes, whether consumer or commercial, aren’t reporting capital repayment holidays, arrears, or defaults consistently as would’ve been the case in the past. This means that impairments under IFRS9 are being understated.
It’s therefore important that banks and other lenders combine multiple data sources with credit bureau data to determine the true credit risk associated with lending. This can be achieved by a forward-looking mix of identity verification, credit bureaus, and Open Banking data.
When considering risk, additional weight should be added to the value associated with Open Banking data, updated daily, and the following should be key factors used in decisioning:
- Evidence of furlough of employees using the HMRC Job Retention Scheme (JRS), identifiable by the use of ‘JRS’ in the narrative of deposits.
- Evidence of loan stacking, including CBILS/BBLS and other non-government guaranteed loans.
- Evidence of a significant reduction of income during lockdown.
- Evidence for a reduction in unique sources of income (e.g. increasing concentration risk).
The brave new world is all about detecting default by combining disparate sources of data and bringing them together in a way that gives early warning of defaults that wasn’t needed before COVID-19.
On the flip side of the coin, thanks to Open Banking and advanced SME lending technology, financial institutions can now look beyond the highly sought after prime credit clients.
With real-time transaction data available at the credit decision point, they can lend more profitably and more effectively to even very low ranked risk buckets with the right pricing to ensure risk compensation.
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