September 2020

This is the most challenging, stressful experience many borrowers will ever face and community expectations of support are high. None of us know how long, how hard and how many. Lenders are now starting to assess customers’ situations and offer longer-term solutions. It is imperative that potential failures – of process, system or people  – are identified fast and enable timely uplift in credit decisioning, assessment and customer support strategies.  

The Australian Banking Association (ABA) has reported that more than 900,000 loans have been deferred to date during COVID-19. Lenders have commenced assessments for customers unable to resume repayments and discuss next steps, with estimates suggesting that at least 450,000 customers will reach the end of their 6 month deferral period in September and October. This is the most challenging situation many customers will face in a lifetime and with heightened sensitivity, time pressures, resource constraints and remote-working all in play, the likelihood and consequences for poor customer or risk outcomes are high.

Recently released guidance from ASIC and AFCA, alongside heightened customer sensitivities, create an environment where there is the potential for large spikes in customer complaints. In its guidance, ASIC notes that it “expects lenders to make all reasonable efforts to work with consumers to keep them in their homes if that is in their best interest”. As we saw throughout the Royal Commission, even just one complaint can trigger a downward spiral that results in damaging reputational and compliance issues.

Now, the pendulum of responsibility has shifted with heightened expectations of lenders as it relates to the actions of borrowers.  Distressed customers will be experiencing significant anxiety, stress and vulnerability. For many customers, it will be irreconcilable to see a fair outcome being the sale of their home, or closure of a business when there is so much uncertainty. Optimistic views of the ability to restart repayments, hope of turning things around in the future and an unwillingness to admit defeat are very real issues that lenders will encounter.

This is an almost impossible balance for lenders to strike – the ongoing support and management of stressed customers across portfolios; whilst responding with the appropriate degree of fairness, honesty and efficiency in circumstances where the options available are not always what the customer wants. After all, what constitutes ‘fair’ in a pandemic? And imagine the scenarios of ‘fairness’ that will be explored at the next inquiry, or Royal Commission with the benefit of 20:20 hindsight.

Proactive management is critical – smart lenders are already ahead of the curve having reviewed monitoring practices to ensure early and timely detection of failure – instead of waiting for a landslide of complaints to confirm there are issues with credit assessments, decisions, and processes.

How confident are you that your organisation is quickly detecting poor credit decisioning practices as your customers start to go through these processes?

Tailored support – challenges abound

Lenders have exponentially increased the number of staff in hardship teams, increased training, and reviewed and adjusted processes to handle the volume of stressed customers that cannot resume repayments at the expiry of loan deferral periods. Whilst lenders have had six months to prepare for this event, the assessment and outcomes are expected to be highly individualised for the customer’s circumstances and require experienced credit judgement to determine the best solutions or options available.

Given the nature of these interactions, numerous challenges are present and the likelihood that something will go wrong is high.

Staff capability and capacityquality and quantity

Staff have been hired, assessment processes and other changes designed and implemented to handle the massive volume of customers needing assessment – but is the capability and capacity right for what needs to be delivered? For some lenders, many staff will also be making these customer contacts in remote-working environments due to COVID-19 lockdown restrictions.

Customer expectationsneeds or wants; processes or outcomes

Every customer’s situation will be different – and probably significantly different to their situation at origination. Who decides what is in their best interest?  Will refusing to provide a particular option result in a complaint? What happens if the customer does not agree to any options or needs more time to decide? What if they don’t have the information needed to make an assessment? How is the balance struck between delivering customer experience (and perceptions that more process means worse experience) with the expectation that the outcomes delivered are in their best interest?

Application of judgement by credit decisioner – art or science

Lenders have to move from origination decision-making that is formulaic and scorecard driven to individualised discussions and assessments. Loan deferrals are not binary, there is no formula that generates the right solution for every customer as every situation is different. The judgement applied to each credit decision is more “art than science” and relies heavily on the experience and capability of the assessor or hardship agent. How do leaders and CROs get comfortable that judgement is of the highest quality, especially when decision-making is highly pressured and resourcing has been scaled up rapidly over the past few months?

Reasonable assumptions

How much appetite is there to flex assumptions in the assessment? If a borrower is employed by a company on JobKeeper in a high risk industry like hospitality, tourism or leisure, how likely are they to remain employed when JobKeeper runs off? What discretion is necessary based on location? If you don’t ask for a complete financial picture, or question the financial position, are you exposed?  

The balancing act of non-financial risk and financial risk

Will acting in the best interests of customers result in quality credit decisions? It appears that these principles are aligned but this is yet to be tested in the context of the current conditions where the risk of moral hazard is high. This becomes even more challenging when the customer has an unrealistic and optimistic view of their ability to survive. In these circumstances, lenders’ appetite to enforce security if necessary will certainly be tested.

Provisioning – what stage, when?

We’ll explore this further in a separate note but suffice to say the implications for which loan deferrals will track into Stage 2 or 3 buckets needs to be considered.

Better customer outcomes and effective risk management – what should you be doing?

Financial health and homes are at risk. Lenders need to be proactive and be able to quickly identify and rectify poor outcomes, before the problems become much bigger. There is too much to lose for a ‘too little, too late’ approach.

Monitoring data ex-post is insufficient to determine the quality of engagement, credit decisions and customer outcomes. One essential early warning measure is timely hindsight reviews. These need to be in place now – even before initial customer contact – to identify problems fast and determine root cause, enabling proactive risk management.

Is the existing hindsight framework fit for purpose?

Most existing assurance and hindsight functions are designed for BAU practices and policies, typically designed to meet objectives regarding compliance with credit risk appetite, policies, and procedures. Stressed customers are now far from being in a BAU environment. The design of hindsight review frameworks for loan deferral assessments and customer engagements needs to align with the assessment’s purpose and objectives. Similarly, adequate and appropriate records of each customer interaction are paramount. Existing hindsight review practices are unlikely to be adequate, especially considering the areas that require testing, assumptions, discretion and judgement that underpin these decisions. This includes both consideration of how the information is collected, interpreted, and analysed as well as the suitability of approved solutions provided given the individual circumstances of the customer. Lenders need to have experienced and independent credit reviewers that can effectively review and challenge the elements of the customer interaction and the quality of the judgement applied. 

Is the hindsight team resourced to meet its objectives?

It is important that hindsight teams are adequately resourced to ensure that they can handle the volume and provide timely feedback loops to ensure the ongoing effectiveness of the processes and decisions. Hindsight reviews may, for example. identify weaknesses with individual assessors/hardship agents that require urgent attention; training and capability gaps; the need for changes in processes and practices for future assessments; provide insights into embedded latent risks that might be building in segments of the portfolio; or identify poor behaviours by assessors/hardship agents.

Rhizome can help

Are you comfortable that your hindsight and assurance practices are adequate to meet the current challenges with assessing the volume of loans at the end of the 6 month deferral period? 

Are they designed to detect poor credit judgement, customer interactions, and outcomes in a timely manner so that remedial action can be taken to ensure the problems identified are addressed quickly (reducing the risk of failure) before the issue becomes fatally systemic?

And are you getting the information you need so that you can answer these questions and satisfy yourself that reasonable steps have been taken?

Rhizome’s credit risk management practice can deliver unique advice based on a combination of regulatory and industry expertise. Key service offerings include design of hindsight review practices to identify areas that need addressing for the current circumstances, outsourcing of credit hindsight reviews, or complementing existing in-house credit hindsight review functions.

We have access to experienced retired credit risk officers that have worked through previous downturns. They help Rhizome deliver the highest quality advice and support to our clients.


This communication provides general information which is current at the time of production.  The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.