Ashish has 20+ years of experience in setting up and managing diverse businesses across the knowledge, consulting, financial services, and technology domains. Ashish Co-Heads OakNorth India where he built and scaled a high-performing team of over 500 individuals across credit analytics, portfolio monitoring, engineering, data science, and machine learning. As a member of the leadership team, Ashish brings strong judgment, customer obsession, and strategic oversight helping teams achieve OakNorth’s mission of transforming SME lending globally.
Investopedia defines “business intelligence” as the procedural and technical infrastructure that collects, stores, and analyzes the data produced by a company’s activities. It’s a term that many in the world of business have come across and indeed employ daily to deliver data-driven decisions.
There are a few reasons why credit intelligence is important and how it can be leveraged to increase the profitability of both lenders and the businesses they lend to:
1) Credit intelligence enables lenders to develop a forward-look view
A typical high-growth business grows at 20% year on year, so the difference between its last 12 months and its next 12 months, is c.40%. So, if a lender is only lending to this business based on its historic data / past performance, they’re not lending to it based on what’s needed to support its current or future growth trajectory. This is akin to driving by only relying on what you can see in the rear-view mirror as opposed to driving looking ahead through the windshield. Credit intelligence is sovery important as it provides lenders with the data and insights they need to build a clear picture of a business’ future growth potential and where it’s going, rather than simply relying on where it’s been. Unfortunately, so many lenders still see high-growth as high-risk, and because they’re unable to develop a reliable forward-look view of a business, they’re unable to get comfortable lending to them. By leveraging credit intelligence, banks can increase their profitability by opening up new loan origination opportunities and hopefully finding a better and faster path to ‘yes’ for the borrower. Meanwhile, the business benefits from hopefully securing the capital it needs to pursue its growth ambitions and in doing so, increases the potential profits it stands to make.
2) Credit intelligence enables lenders to develop a granular, loan-level understanding of a business
Traditional commercial lenders tend to lump all businesses into one of a dozen or so categories – for example, all restaurants, hotels, bars, leisure facilities, etc. fall under “hospitality and leisure”. All shops no matter what they sell or whether they’re online, offline or both are classified as “retail”. There are a couple of issues with this approach – firstly, it ignores the unique differences between businesses within the same sector, and secondly, human bias can mean that certain relationship managers or teams are reluctant to lend to a specific business because it falls in a sector they have had a negative credit experience with in the past. This issue was thrown into the spotlight over the last two years with COVID as businesses within similar sectors or sub-sectors had vastly different experiences at different stages of the pandemic. Take a golf club and an indoor climbing centre in the same city for example – both would be classified as “physical leisure activities”, but their experiences over the last two years will have varied significantly. The golf club – which takes place outdoors, is played across huge social distances, and where players bring their own clubs – will likely have been able to re-open and begin trading much sooner than the indoor climbing centre which, being indoors, will have less fresh air, and which will see climbers touching the same climbing holds in quick succession. By leveraging credit intelligence, commercial lenders can develop a granular, loan-level understanding of a business which will enable them to structure a facility that’s bespoke for that business’ needs. This also benefits the business as it will be getting a credit facility that’s much more fit for purpose.
3) Credit intelligence enables lenders to prepare for the unprecedented by conducting events-base scenario analysis
As demonstrated by the COVID-19 pandemic, when it comes to adverse events, the traditional approach to commercial lending – using historical data, financial modelling of a base case, worst case and best-case scenario, and conducting annual reviews – is an approach that is not fit for purpose. In uneventful times, these models are fine. However, for unprecedented events such as the pandemic, the traditional models proved useless as historical correlations were broken; employing the traditional look-back approach was meaningless.
How many lenders would be prepared for an event such as an outbreak of avian influenza virus – also known as “bird flu” – for example? During the Springspring and Summersummer of 2015, the disease spread through the Midwest of the US, leading to the loss of over 50 million birds and the ban of US poultry from export from several countries including Mexico, Japan and Singapore. Most lenders would react to an event like this by mapping out the sectors in their portfolio that are likely to be impacted and prioritizing activity based on exposure. They would waste valuable time on loans that don’t end up presenting much risk, and potentially miss some of those that do.
Credit intelligence is able to do a “bottom-up” evaluation of banks’ entire loan books, assigning each business a vulnerability rating based on a subsector-specific, forward-looking credit scenario taking liquidity, debt capacity and profitability into account. It enables lenders to prioritize activities (review, doc collection, renewals, etc.) far more effectively than manual processes, creating operational efficiency by targeting efforts at the relationships where this will have the greatest impact. This more dynamic view of risk is still valuable in a more stable economy because we can update risk inside a lender’s review cycles, allowing them to take a critical view of their loan book and maintain constant focus on the items of highest impact. Lenders gain a competitive advantage when it comes to commercial credit as they’re able to react far more quickly and effectively if an unexpected event occurs.
The realization that many industries experienced though COVID-19 is the same: we can’t predict the future but must be better prepared for the unknown and reduce risks across our businesses with an ability to adapt quickly with data-driven decision making – which is exactly what credit intelligence provides.