Bank NPLs (23) - The Case for a New Approach


Sunday, June 07, 2020 07:00 AM / by Debtors Africa/ Header Image Credit:   EcoGraphics

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Closing Thoughts - The Case for A New Approach

The old lending paradigm has rested on traditional approaches to the loan process. The process has involved the creation of debt the management of debt and the resolution of debt (either by due loan repayment or by any other legal method of loan recovery). The model has been standard fare for decades if not centuries (see illustration 6 below).


The loan creation process starts with a customer's loan request and proceeds to loan evaluation/appraisal and loan approval or rejection. If the loan is approved and disbursement made, then the loan management process follows requiring the lender to monitor the individual's or organization's cash flow to ensure that there is no fund diversion and that cash flows from operations are consistent with the initial credit appraisal memorandum (CAM). Two outcomes emerge from this process; the debt is repaid along the terms of the original loan agreement or the loan requires adjustments either by restructuring or by a debt recovery process if the debtor cannot or is unwilling to repay.

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The New Approach


 With opportunities for better debtor profiling before loans are granted, the loan process can be de-risked by improved borrower knowledge and monitoring. The use of digital registers of borrower's activity across the financial service sector provides a loan marker which enables new lenders insight into the character of borrower. The new approach would embed a customer's borrowing journey into a digital framework that can be reviewed by lending institutions. The digital register differs from a credit bureau; while a credit bureau provides a scoring system to determine whether a borrower is a fit and proper person to take a loan, the digital register is a dynamic record of strictly delinquent and hardcore borrowers. The record looks at the amount outstanding, the customer address and business and details of directors if the customer is a company. The register replaces the old perishable "name" and "shame" approach tried by AMCON and Access Bank Plc. The "perishability" of hard copy print list of delinquent customers makes its effectiveness limited. However, a digital list of bank customers that are delinquent or unwilling to pay debts is more permanent and overcomes the psychological impact of "saliency" and "recency".

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The online digital register is a quick recourse for base rate references on a prospective borrower's existing credit position. The lender can screen the borrower while also assessing the character of the corporation or individual with respect to recent and past loans received. The register could serve as a pre-emptive tool at the point of loan appraisal, a digital monitor at the point of loan administration, and a loan recovery tool at the point of loan repayment (see illustration 7 below).  

Illustration 7: Debt recovery/Management new indicative paradigm

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Generation Y and Z and The New Lending Age


On the bright side the new generation of borrowers would show a socio-cultural dynamic significantly different from the past, while generation X was insular and consumed with making their individual ways through life along lines consistent with Social Darwinism (survival of the fittest), the generation Y and Z are more communal and more aggressively interested in finding meaning for their lives as they navigate the digital landscape.  As netizens this younger generation are creative, conversational and mobile, meaning they do not stay too long in an activity set or a transaction (see illustration 8 below).

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Most of these men and women set up new businesses and grow them to a point where they can sell them and move on to other things (Andela, Flutterwave,, and Farmcrowdy). The new generation of borrowers are likely to be more financially savvy, focused and sensitive to their on-line reputation, which means that they can ill-afford the consequences of a poor digitally referable credit record or credit score. With the rise of digital intervention in the loan monitoring and reporting business, the incidence of delinquent or bad debts would likely reduce over time as is suggested by the declining bank NPL to Loans ratios.


The new approach to loan management, therefore, would increasingly turn to digital platforms that make the borrower less anonymous, reduces informational asymmetry and penalizes bad behavior through the saliency of recent borrowing history and digital reference of creditors to borrower's credit status. A list of hardcore debtors with their profiles published according to debt size, debt age, pledged collateral, directors of the company and repayment history, including reports on industry status and the potential for corporate defaults based on industry risk, would provide an intervention service that would reduce lending uncertainty and improve the lending-decision process.


The new approach shifts the lending process from an old and problematic analogue framework to a more dynamic digital architecture that creates value through shared digital information.


The lending Cycle/Ecosystem-Old Thoughts, New Realities

The traditional lending cycle is not likely to change but the context of lending will face new realities. The lending ecosystem will stay the same but the execution of duties within the ecosystem will certainly change. Digital technology and informatics will become a more significant aspect of the modern lending playbook.

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Bank Lenders


Banking institutions will have to migrate from the tombs of physical files used in monitoring loans to a more aggressive and effective digital loan management format that keeps track of loan status and loan aging. Those that are classified as delinquent are instantly updated onto the platform. Loans on the platform become subject of regular review to update status as debtors enter into negotiated settlement with the bank and the size of loans outstanding shrink.


However, banks would need to act briskly as the rise in bad and delinquent debts would mean the cutting down of profit before tax of many bank lenders as provisions of IFRS9 increase their impairment charges from 2020. The increase in delinquency would mean that banks would need to reduce operating expenses and depend more heavily on digital technology to remain profitable and sustainable.

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Non-Bank Lenders


Non-bank lenders could also make use of the platform to manage delinquent loans and adopt strategies similar to banking institutions to create loan workout opportunities which would be reflected in the changing status of the borrower on the contributor's registry on the site.

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Credit Bureaus


Credit Bureaus would likely see a spike in activities as more businesses stumble and fall in 2020 and 2021 as revenues cave in and operating cash flows shrink. The rising evaluations of credit and creditors by Bureaus would mean that they would need a stream of up-to-date information on credit status of individual debtors, this could be searched for on as contributors regular update the status of their delinquent debtor's registry.

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Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018

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