The Relationship Between Climate Change and Credit Scoring
13 Feb, 2020
Climate change and it’s affect on risk and credit scoring.
Off the back of the National Bank of Malaysia’s (Bank Negara Malaysia or BNM) temporary measure to boost in the SME sector, we re-examine the need for responsive lending and how credit providers as well as businesses can utilise digital platforms to remain agile in challenging economic times.
The Edge Malaysia reported last month that BNM had announced some changes around the rescheduling and restructuring of loans, hence relaxing the existing guidelines which would enable credit providers some leeway as well as alleviate the pressure of loans being pushed into negative classification in the national credit rating system. This move has been welcomed by the SME Association of Malaysia and businesses, but it is far from the solution to the tough times the market is facing, both from internal as well as global geopolitical events.
The call to businesses is basically that of, ‘we’re doing our bit, but you need to get with the program too’. The government has long been a proponent of using technology and innovation to increase competitiveness in the SME market, which like in all developing economies, makes up a sizeable chunk and therefore a collectively significant contributor to economic growth. Now could not be a better time to dip into the fintech cookie jar.
Right down the lending chain, from the big banks to P2P lenders, to aggregators and SME’s themselves, organizations have no excuse not to leverage technology. Lending requirements and evaluation metrics need to change with the times. There is no one-size-fits-all rating or score which is why it’s essential that financiers and credit providers equip themselves with versatile solutions that will enable them to configure decisioning criteria that take immediate effect.
The key in evaluating a Credit Decisioning solution would therefore be, how easy is it to establish new credit assessment criteria and change existing ones without having to go through the rigmarole of software application development and tech support. And from that, roll back to previous lending policies. Businesses should ask themselves and their potential software partners, ‘how quickly can I make a change to my credit decision rules and change the basis upon which I provide credit?’.
The policy change management process notwithstanding, this should be achievable instantly, so once the top brass say yay or nay, new or adjusted credit policies should benefit customers the very next minute, hour or day, and not six months later when the winds of change have started blowing the other way. That’s a lot of planning, management brainpower and costly man-hour dollars down the drain.
Secondly, how can businesses analyze hypothetical changes to their scoring rules without upsetting the status quo? A solution with internal scoring configuration capability enables businesses that rely on comprehensive sets of data to build up a score the benefit of an intuitive score-building tool with features to simulate changes in the score thresholds against existing lending results. This facilitates risk management, policy change buy-in and encourages lenders and SME’s to look towards data-driven decision-making with measurable, traceable results.