18 AUGUST 2020 | BY JAY BENJAMIN
The last decade has seen a similar decline in collision-like incidents in banking as the recovery from the 2008 financial crisis has caused banks to take a different approach to diversified loan portfolios, reduce their risk profiles overall, and adopt new technologies such as mobile check deposit, AI-based chat bots for greater customer service, and increased options for mobile users. But there is one area that has not changed much over the last 20 years, and that is how banks manage delinquent loans, or Non-Performing Loans, NPL’s.
In the majority of banks today, the process looks a bit like this:
While this process has worked, and when combined with the risk reduction work over the last 10 years, banks were well suited to ride out any financial storm that would come their way. Their loss allowance accounts were more than enough to cover any bad loans and the system was working smoothly.
Then Covid hit.
To be fair, there were early indications of stress that the market was at its peak at the end of 2019, before Covid spread globally, but the pandemic only amplified the tsunami of loans that were in distress
In Q3 2020, 875 banks in the US alone experienced an increase in NPL’s that outpaced the amount of loss allowance funds set aside to cover those loans