The speed at which the Coronavirus Business Interruption Loans Scheme (CBILS) was deployed to ensure UK business stability, at what was probably the most precarious time for British business since the end of World War II, has been a testament to the agility, commitment and professionalism of the UK banking industry.
However, as the COVID-19 pandemic unfolds those businesses who have taken out these government backed loans will have to consider a sensible repayment strategy as we emerge from this crisis and they begin trading again.
While the UK Government has agreed to underwrite the majority of the loans, financial institutions who have awarded CBILS and Business Bounce-back Loans (BBLS) will still be expected to make efforts to recover them where appropriate.
This recovery process will obviously impact these institutions as they deploy costly resources to administer and engage with customers on developing sensible repayment plans.
Additionally there are instances where a proportion of the write-off of some loans provided will directly impact banks directly, financially1.
The following analysis from one of Synectics Solutions' data aggregation Subject Matter Experts considers how access to collaborative fraud intelligence, enriched with additional business composition data, can help banks to cost effectively create a CBILS / BBLS loan recovery strategy that will help them to identify fraud - as well as avoid wasting valuable resources trying to recover loans from businesses who are still unable to trade.
Describing the current situation in the UK as an ”“unprecedented time” has become cliché over the last 12 weeks. The British economy has been forecast to be potentially facing the biggest recession in over 300 years2, with small to medium sized businesses across the country facing over £105 Billion of unsustainable debt3.
Unsurprisingly UK industry has turned to the British Government for support, who in turn have relied upon British banks to spearhead the distribution of the economic stimulus packages - which were speedily put in place to mitigate the risk of total economic collapse in the face of the COVID 19 pandemic.
What began with a £30bn stimulus package4 soon turned into £330bn5, with measures mainly focusing on paying staff wages, payment holidays, and propping up businesses that are unable to trade as usual due to the lockdown.
However, fears are already growing that UK banks will be saddled with over £36 Billion in toxic debts from loans that will ultimately become unrecoverable as outlined in this recent analysis by The Guardian6.
Outside of covering staff costs, stimulus packages for businesses have fallen under two schemes – the Coronavirus Business Interruption Loans Scheme (CBILS) & the Bounce Back Loans Scheme (BBLS).
Fraud checks were one of the few measures included within the BBLS scheme as it was rolled out.
In fact Synectics’ collaborative fraud intelligence database (National SIRA) has been at the heart of the measures in place to help with that and was a resource specifically mentioned within the UK Government’s legislation accompanying the BBLS and CBILS schemes.
As a result, Synectics have already processed a large proportion of these loans and are able to easily identify incidences of fraud, where a business may have successfully applied for multiple loans with multiple lenders.
For the BBLS, banks have been mandated to underwrite loans without assessing affordability. Now as the dust is beginning to settle, it is essential to begin prioritising post-award fraud checks, collections & recovery processes to effectively identify which businesses should be getting in touch with their banks to arrange a repayment strategy as they begin trading again over the next 12-18 months.
However, to create a more effective collection strategy for these loans, and one that goes beyond just a simple fraud check, we would advise analysing a wider set of risk factors to create a much more intelligent recovery strategy that will help to better prioritise cases, that require investigation or recovery - and avoids a costly and ineffective ‘one size fits all’ approach to your collections processes.
For the BBLS, banks have been mandated to underwrite loans without assessing affordability. Now as the dust is beginning to settle, it is essential to begin prioritising post-award fraud checks, collections and recovery processes.”
was the business trading prior to lockdown and has the business begun trading again?
is there financial information available about the business to assess affordability and repayment?
is the business located in an area which was already struggling prior to the lockdown, and how is this area recovering in comparison to the national average?
are there any characteristics about key personnel related to the business (directors, board members, etc.) that indicate poor financial health and/or potential to commit fraudulent activity?
is the business in a high risk sector (leisure, retail, hospitality, etc.?)
"The British economy has been forecast to be potentially facing the biggest recession in over 300 years”
Following the identification of the risk factors, the aggregation and analysis of various proprietary, public and third party data sources can create a much more holistic view of risk associated with each business that has used any of the loan schemes.
Ultimately this will provide lenders with actionable intelligence to enable them to finesse their collection strategies and prioritise efforts for recovery much more effectively. This will save significant time and resource in targeting collections and recovery investigations where they are most appropriate.
Synectics recommend an approach that encompasses a range of intelligence sources to achieve this kind of process such as:
assessing the fraud risk associated with both the business and key personnel, whilst identifying potential businesses that may have applied for multiple loans.
amalgamating publicly available information about businesses (Food Standards Agency, Charities Commission etc.) with public sector fraud data held within the National Fraud Initiative to identify material discrepancies.
intelligence regarding the historical, current and future trading status of businesses, including geodemographics, vacancy rates, openings and closures activity, company structure, etc.
financial indicators for both businesses and key personnel to ensure businesses are beginning to recover, including financial information regarding payment holidays, furlough and unemployment indicators.
Once this aggregated view of commercial risk is built we would recommend creating a regularly updated matrix that could then provide a much more intelligently prioritised group of customers for the bank to focus their collections strategy on.
This could be achieved by applying a set of business rules to use the intelligence mentioned above to match and rank businesses based on various criteria, reflective of the likelihood of recovery, and subsequent prioritisation of collections activity.
Conversely, there should also be a significant focus on identifying businesses which are not likely to resume trading and ultimately default.
Further analysis could also provide geographic, business sector, or commercial risk analysis depending upon how the remaining effects of this pandemic affect certain sectors and impact their wider credit & affordability issues.
With a strategy, such as the one outlined, a much more targeted and cost effective process can be put in place focused only those businesses that will be in a position to begin repayment (of both CBILS and BBLS loans) in the next 12-18 months.
Businesses that are unlikely to survive could ultimately be written off, to avoid wasting valuable resources on loans that won’t be recovered and will have to be underwritten by HM Treasury.
There should also be a focus on potential fraudulent applications from businesses taking advantage of the scheme via applying through multiple lenders, or multiple organisations from the same corporate structure applying (e.g. individual pubs in a pub chain).
”“Businesses that are unlikely to survive could ultimately be written off, to avoid wasting valuable resources on loans that won’t be recovered...”
Banks could utilise 3rd party resource on a ”“pay as you recover” basis to maximise returns in this area, mitigating sunk spend on recovery in this continuing uncertain collections landscape.
"Synectics have already processed a large proportion of these loans and are able to easily identify incidences of fraud.”
For more information regarding Synectics’ initiatives for CBILS & BBLS post-award checks, collections & recoveries please get in touch with Synectics Solutions Consultant, Chris Lewis at chris.lewis@synectics-solutions.com
4. https://www.theguardian.com/uk-news/2020/mar/11/budget-2020-rishi-sunak-spending-coronavirus