Low oil prices: High time for a transformation in lending
In August 2005 the price of crude oil was around $80 a barrel. By June 2008 it was over $150, and barring a short period in 2009, it traded consistently above $80 for nearly a decade. In 2014, who would have predicted that it would crash to below $30 and settle around $50? So, is $50 the new normal? Opinions vary but no one can be certain. What is certain is that the downward swing in oil prices has had positive effects for oil importing countries but massive negative impacts on oil exporting countries.
An article in ‘The Economist’, discusses the implications of lower crude prices on banks in countries which are heavily dependent on revenue from oil exports to balance national budgets. While countries with substantial foreign currency reserves such as Saudi Arabia, Kuwait, UAE and Russia have been able to withstand the impact by dipping into their reserves, others such as Iran, Venezuela, Iraq, Nigeria, Mexico and Columbia have been less fortunate. In fact, they may have to raise rates, tighten monetary policy and devaluate their currencies. This could lead to situations similar to that in Nigeria, where the devaluation of the Naira has adversely affected Nigerian banks’ creditworthiness or situations such as Azerbaijan, where banks’ liabilities shot up tremendously relative to their assets. Regardless of which scenario plays out, low oil prices will have a long lasting effect on oil producers’ economies and the way banks go about their core business of lending.
The implications for lending are tremendous. As liquidity tightens, banks need to explore new ways to increase revenue and reduce their costs. Reducing customer churn and trying to increase the banks’ share of wallet would also be very high on the agenda. A possible slowdown in regional economic activity could translate into increasing levels of non-performing loans (NPLs). Hence, the focus would shift to not only reducing NPLs but also making more informed, real-time credit decisions. As a result of the squeeze on incomes, countries in the Middle East and Africa are drawing down reserves and taking on debt on the one hand, while imposing spending cuts on the other. Banks will also have to change their way of approaching business. The way ahead looks challenging and the ability to navigate successfully would require equipping the organization with the right tools and processes.
However while these scenarios may be new to these countries, they are certainly not unprecedented and maybe we could learn from others’ experiences. The obvious question that comes to mind is, ‘How can banks make the best use of the resources they already have?’ The situation should be looked upon as an opportunity to step back, ask strategic questions, analyze the options and pick the best moves forward. Is this the right moment to consider digitization? Would a completely automated, paperless organization enhance productivity and reduce costs? How about moving a significant number of transactions across the customer lifecycle to lower cost channels such as mobile? Why not use predictive analytics to make better credit decisions faster? What if there was a way to improve collections by analysing customer behaviour in advance and reduce delinquencies?
Well, the answers will definitely vary depending on how effectively the banks are able to realize the huge value that can be unlocked with each of these steps. Transformation in itself is a big word, but the right step, even a small one, taken at the right time can be a huge enabler; a case in point being the rise of FinTech companies. While it is true that they had the advantage of starting with a clean slate, without the baggage of legacy systems and cumbersome processes, their success in creating their own niches in a highly competitive and crowded space cannot be easily denied. FinTech companies have created new segments like P2P lending, Crowd funding, Crypto-currency and Blockchain but many have just leveraged technology and innovative thinking to bridge the gap between customer expectations and existing banking services. The banks can definitely adopt some of the successful approaches used by FinTechs. My earlier post, talks about FinTech’s focus on customer centricity which could be an improvement area for the banks.
So how can technology help the banks that are ready to make the move? Right from the beginning, from identifying the most suitable target segment and creating tailored products to quickly launching new offerings in the market, advanced technology can make a big difference. It is imperative for every forward looking organization to embark on the digitization journey in lending and reduce their dependency on outdated systems. The ability to make credit decisions with comprehensive data inputs and without dependency on a person’s judgement is fast becoming table-stakes. Customers are now getting used to faster, digitized processes and real time access to information at their fingertips. Not only can the use of analytics across the loan lifecycle improve accuracy in new business growth, but it can also ensure better return on investments intended for profit maximization.
While the current business environment may be volatile and the going may be tough, it is also an ideal time to dig deeper and get ready for the next phase. A number of banks, especially in the most affected countries have already started re-aligning their operations to address the changing circumstances. Technology can definitely help but it is important for the banks to decide to take the next step forward in their transformation journey.