From Economic Uncertainty to the Need to Identify the Risk Factors of Non-payments Following COVID-19

Press Release
GDS Modellica
21/12/2021
As a result of its healthy solvency and liquidity, the banking sector played a key role during the pandemic, supplying credit and offering deferred payments to families and businesses in order to avoid an economic collapse.
GDS Modellica advocates prior risk management to increase revenue. Their Originations solution is a vital tool for loan management and the originations process
With the improved situation in hospitals and normality fast returning, the state of emergency that we have lived through for the past year and a half seems to be coming to an end. However, in the financial sector, the effects will continue to be felt until the support measures finally disappear. The sector took broad and extraordinary steps during the crisis to provide support to keep the economy stable and absorb part of the unprecedented impact of the pandemic, thanks largely to the healthy solvency and extraordinary liquidity that the banking sector was enjoying at the time.

Capital adequacy ratios in the financial sector have stayed well above the minimum required due to the credit supplied to the economy to prevent shutdowns and bankruptcies. According to the Spanish Banking Association (Asociación Española de Banca), this moratorium helped provide financial relief to one and a half million Spanish families and self-employed workers. At the time, profitability in the Spanish banking sector was at its highest following the merger of CaixaBank and Bankia. In the second quarter of 2021, The Bank of Spain put late payments at 3.02%, slightly higher than in the first quarter. It is important that economic policies focus on maintaining support for businesses, particularly for those companies who are less solvent, to avoid job losses and the destruction of the productive sector. Otherwise, we could see the triggering of an overall financial crisis.

The banking sector has been key to protecting many businesses and may well continue to be a part of the solution, providing credit to families and companies in a way that gradually allows all sections of the economy to get running once again. For sustainable growth, it is important to be able to process credit applications in a smart, consistent and profitable way with efficient technology that uses all the available data to better understand customer behaviour.
The originations process is a key part of lending and an area in which there is fierce competition. These days, consumers are able to research and compare financial products and services in a way that was impossible before. GDS Modellica’s Originations solution allows their clients to reinvent the originations process by combining analytics with market-leading technology in a single, powerful framework. With strong decision-making and process management capabilities, their solution combines data, analysis and decision technology to increase the customer “lifetime value”. The Modellica Originations Engine (MOE) is a flexible solution allowing companies to create, manage and improve strategies in a faster, more convenient and personalised way whilst maintaining compliance within a very strict regulatory environment.

The current financial ecosystem faces the double challenge of managing a credit portfolio that has potentially been damaged by the crisis, on the one hand, and handling the complete transformation of its traditional business, on the other. Furthermore, there was already a raft of challenges facing the sector before COVID-19, such as low profitability and the risks involves in the intensive use of technology. Furthermore, according to the Spanish Banking Association, ICO loans (Spanish government loans) helped banks to provide €120 billion in 2020 to almost a million companies, of which 98% were SMEs. Some 1.5 million families and self-employed workers benefitted from the moratorium and the banks lost €6.955 billion in 2020 after strengthening their balances to the tune of €12 billion. In the short term, the banks face uncertainty regarding what will happen once the ICO loans, ERTE measures (employee support payments) and extended moratoriums end on 31 December 2021. Without a doubt, late payments will increase, and many SMEs will face serious problems with liquidity, leverage ratios and access to traditional credit. Ultimately, investment banking will have to adapt in order to offer alternative solutions to SMEs to avoid a spike in bankruptcies and prevent job losses.

Amongst all these challenges, says GDS Modellica, the banking sector also has to properly manage risk, as it has done until now, to stay healthy. Here, technology will play a key role. Technology is here to stay and be used, and it can be a significant help for tasks and operations in all processes. The digital transformation is providing increased revenue, improved cybersecurity, better customer relationships and more sustainable business initiatives in the financial sector. Looking to the future, the most important transformation will be to tackle the complexity of implementing new technologies and navigating new niches markets of digital natives whilst dealing with traditional competitors.
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