Page 18 - coffee table book-Nov 2020 - web_Neat

5.2 interventions, such as Early Warning Systems. financials, industry analysis of companies involved in the

Identifying Sector-based risks through Early value chain, channel checks, media information on
borrowers, related industries and countries involved in the
Warning Systems supply chain), giving bankers an early indicator of potential
stress areas for pre-emptive action.
Ÿ Once an event like COVID-19 occurs, risk management
professionals can tap into the power of Early Warning
Receivables/payable analysis
Systems to identify potential risk areas, based on drivers
For service industries like IT, contractors or financial
including customer/industry sectors, geographies, and
institutions, the impact may be felt immediately on
TECH associated linkages. collections/receivables due to delays or disputes which an
Ÿ A sectoral impact analysis of COVID-19 by the Early Warning System could detect by monitoring abnormal
INTERVENTIONS TO Confederation of Indian Industry lists the following: hikes in debtors holding levels, litigations, BG invocations,

AID CREDIT RISK Ÿ Stress on topline in the auto industry due to severe fall in etc.
demand from China for luxury cars, and an impact on Account turnover analysis
MANAGEMENT IN working capital management due to stoppage of import Any fluctuations in sales or collections from debtors would
of components, especially EV batteries, from China quickly get reflected in the turnover of the borrower
COVID-19
Ÿ Complete production shutdown for pharma and account, which can be monitored using metrics like credit
AFTERMATH PART I chemical companies depending on China for the bulk of summations or debit/credit summation ratios for warning
their raw materials signs.
AN ORGANISATION MUST UTILISE MEASURES
LIKE PORTFOLIO DIVERSIFICATION AND Ÿ Negative impact on technology companies, including Analysis of borrower delinquency with other banks
TECHNOLOGY-LED RISK MITIGATION TO STAY electronics and renewable energy, which source most Credit Bureaus provide vital information on the behaviour of
FINANCIALLY VIABLE AND PROTECTED WHEN raw material and finished goods from China a borrower with all the financial institutions. By scanning
UNCERTAINTY STRIKES. their loan portfolios for elongated past dues, banks can pick
Ÿ Logistics, shipping and transportation sectors reeling from
multiyear low demand due to stuck shipments and up early warning signals utilising information at a
consolidated level from the banking industry.
increased shipment costs
Ÿ Spinning mills facing lack of orders due to closure of Starting with such analyses, a systematic, in-depth
textile factories in China – a key market for India assessment of credit risk through early warning signals can
April 21 2020
be performed, and be used to score specific customers or
Ÿ Tourism, aviation and hospitality sectors seeing close to segments to ascertain riskiness on an aggregated basis. This
zero activity with voluntary/enforced travel bans globally
Jaya Vaidhyanathan can aid in calibrated, targeted action for each large borrower
CEO, BCT Digital Early Warning Systems can be used to keep a close tab on account or customer segment, rather than employing a
one-size-fits-all approach.
companies and industries, and their associated credit risks to
the financial sector, as described below:
While it may not be possible to forecast extreme events in
this dynamic environment, impacts of these on a financial
Supply chain disruptions
For manufacturing industries, the stability of their forward institution can be measured, monitored and mitigated in a
targeted manner, through careful channelling of resources;
and backward supply chain is a good risk indicator. Credit
In the last 100 odd days, the microscopic organism, SARS- pandemic, which wasn’t even taken seriously a few months using technology-based solutions like Early Warning
risk may arise as a consequence of glitches in material supply
CoV-2, has sent the world running for cover. On an ago. Such black swan events are unpredictable, yet may Systems. An organisation must utilise measures like portfolio
(from higher costs to outright business closure) or in sale of
economic scale, COVID-19 is estimated to shave off 0.15- have catastrophic consequences. The average risk diversification and technology-led risk mitigation to stay
finished goods due to forced demand shortage from
0.35% of Indian GDP and 0.1-0.4% of global GDP. practitioner uses historical frameworks and data for decision- financially viable and protected when uncertainty strikes.
traditional customers. This is also why bankers perceive
Governments, global organisations, large industries, and making. In this context, black swan events pose a significant
vertically integrated conglomerates as safe bets.
central banks are frantically working on face-saving solutions, challenge, as they are neither have any historical reference
including fiscal stimuli, loan moratoriums, and forbearance of frame nor are utterly benign. An Early Warning System can capture critical information
asset qualification norms. from sources internal to the bank (including
Predicting black swan events accurately is a tall order. But,
debtors/creditors statements, monthly operational
The world is currently witnessing multiple “black swan” their negative fallout on financial institutions’ credit risk
statements) as well as those external to the bank (including
events, most prominent among these being the COVID-19 profiles can be managed through technology-based

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