SME loan recovery – six challenges facing banks

The world looks very different today than it did only a few years ago. A global pandemic and unstable political environment have disrupted the European economy and payment landscape, impacting companies of all sizes. Particularly vulnerable to changes in demand and supply are SMEs, who are dependent on healthy liquidity to meet their own debt obligations.

Lenders across Europe must ensure effective and sensitive recovery of funds lent to small and medium-sized (SME) businesses. Due to the pandemic, much of this credit is backed by government guarantee, meaning public money is at stake.

What are the key challenges facing the banks?

Resources:

Many banks were not prepared for high volume collections. In the recent past, defaults by SMEs have been low. As a result, many lenders don’t have the capacity to deal with rising volumes of non-performing loans. Scaling up at speed is difficult, requiring additional specialist personnel and investment.

Technology:

Legacy systems can make it difficult for banks to collect effectively and significant investment is needed to match today’s best-in-class standard. With large volumes, 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 need to concentrate their product innovation, digitalisation and cost efficiency programmes on their core business rather than be distracted by collection and recoveries.

Volumes:

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 impact a bank’s bottom line in the short and medium-term. Investment in specialised talent, data, systems and analytics would also require restructuring when the spike is worked through. Historic experience suggests at least a 10% collections uplift when outsourcing to a specialist provider – a key difference in revenues over time.

Customer experience:

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 are essential from an ethical and reputational perspective.

The most important thing is for banks and their partners to tailor solutions to specific circumstances – this is the best way to ensure higher recoveries and deliver a positive customer experience.

What can you do to mitigate the risks?

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. 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.

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