Minimising COVID's Impact on Credit Risk Management: Strategies and Methods

Whether you are getting into a new deal with a new supplier, or you are a bank approving a loan for a small or medium enterprise, a credit risk assessment, run as part of a credit risk management process, is important to help build trust and minimise risk to your own company

The COVID-19 pandemic has, however, not only affected the credit rating of many businesses, but also hindered the process of credit risk assessment across many markets around the world. Considering that the credit crisis arising from the pandemic may have not fully materialised yet and the COVID's economic damage is not yet done, this hindering of credit risk management will undoubtedly be alarming for many companies that trade around the world.

In such times, it becomes even more important to gauge credit risk accurately, based on credible data from verified and relevant sources. First, let us understand the impact of COVID-19 on credit risk management.

COVID's Impacts on Credit Risk Management

1. Increased Credit Risks and Supply Line Disruptions

The pandemic shock caused disruptions to supply lines, affecting payments and leading to cash flow issues that made credit risk levels surge. This also led to increased probability of default (PD) as well as company closures. In Singapore, the average PD was already at an elevated level before the pandemic, and it increased by 20% by May 2020 itself. The sectors which have been negatively impacted are experiencing reduced demand globally along with a pull-back in spending. These trends might be a common sight in the near future too.

2. Disruptions to Traditional/Physical Assessment

For companies which follow traditional credit models based on historical data provided in hard copy documents, due to the travel restrictions imposed by COVID-19, it has also become difficult to conduct a physical verification of any potential partner during the compliance process. In normal conditions, this would be an important step in developing trust between businesses. In current conditions, this is often simply not possible, and companies with no backup processes prepared will be disoriented by the magnitude of the change.

3. Difficulty in Gathering Digital Information on Smaller Companies

Small and medium businesses usually lack a detailed digital documentation footprint that can be relied on while conducting a credit risk assessment. COVID has made it even harder by disrupting the already challenging information gathering process for such companies.

4. Decreased efficiency

The COVID-19 lockdown would have caused an upheaval in companies reliant on manual processes. Remote working, sudden lockdowns and quarantine could lead to inefficiencies in the credit risk assessment process due to delays, unavailability of information, or insufficient digitisation and remote access to data. The effects of these inefficiencies might not be fully felt until quantifiable data is available to measure their impact on a business.

5. Temptation to Compromise to Keep Supply Lines Moving

With the COVID-19 pandemic creating restrictions on normal operating processes, businesses had to come up with new ways to keep supply lines functioning as smoothly as possible. This might be achieved by reaching some compromise in their credit risk management processes, which could lead to them failing to detect, or consciously accepting, a higher credit risk than feasible.

Coping with COVID when Assessing Credit Risk

To deal with these challenges arising while assessing credit risk, companies need access to accurate and timely information that can bypass the need for traditional physical means of verification. Here are some ways your organisation can use robust business data collection to cope with the impact of COVID.

1) Strengthening Data Gathering with Alternative Sources

In a time when physical credit information can be difficult to obtain, specialised business information providers like CRIF BizInsights can be helpful. They can gather data and information from alternative trusted sources, and not just the partner or customer you are doing business with.

This is important while conducting a credit risk assessment for small and medium business enterprises which might not have accurate or up-to-date data readily available. However, it can also be used internally for enterprise resource planning, supply chain management and other stages of the business cycle.

2) Automating Data Gathering with APIs

The use of Application Programming Interfaces (APIs) can help companies to automate the acquisition of business data, and integrate the search process with the company's existing business software. CRIF BizInsights spearheads API technology that provides clients with access to numerous report types that draw on official sources such as ACRA in Singapore. These reports are invaluable in decision-making not only for credit risk management, but also for KYC compliance as well as other screening and compliance needs.

3) Building Company Information Databases

Business information is a constant need, both for your credit risk management process and others. To mitigate risk effectively, you will need access to fresh and updated data from time to time, but more importantly, you need a database capable of processing and storing the data.

Furthermore, CRIF BizInsights can also help you build your own database to automate the retrieval of this data, as well as manage and analyse it. Through its proprietary API technology, such a database can also be integrated into your organisation's business software, enabling the business data you obtain through search to be converted into an immediately usable form for your own processes.

Minimising the Impact of COVID on Credit Risk Management

COVID has caused great disruption to global business processes and credit risk management. However, with timely digital transformation and the right technological solutions delivered by the experts in the field, it is possible to mitigate and minimise its impact on your organisation, and ensure that you still maintain a robust system that can secure your financial peace of mind.