Let’s embrace risk to mitigate it

Marching towards next level of collaboration.

This time, I am writing on Risk Management, a topic which has come in our professional and personal lives in ways previously unimaginable but not much has been written on it.

On 16th March 2020, when our office declared work from home, we equated it with the swine flu shutdown of 2010 and thought all of us would be back in office in less than two weeks.

I now realise I couldn’t have been farther from reality.

This inherent uncertainty of COVID-19 has changed our relationship with risk. During the lockdown, even everyday tasks such as stepping out of the house for groceries or bringing the domestic help in are now considered risky.

To help the economy get back on its feet, every subsequent unlock phase has looked at embracing more risks, albeit in a calibrated manner. The epidemic would eventually result in all of us attributing a higher weightage to risk management in every decision we make in our lives going forward.

The burning question

Similar to our personal lives, risk has been ingrained into the banking world since ages – in fact banking is called the business of taking risk. While managing one risk at a time is a routine work for us, complexity increases exponentially with multiple risks to be managed at a given point in time. We experienced glimpses of this phenomenon during the 2008 financial crisis. However, it is in different forms and intensity during these current times. We have to look out for all the ‘known’ risks - credit, liquidity, operational, regulatory, geo-political, market, conduct, cyber security, etc., but also assess the ‘known unknown’ risks at the same time. Here a team or an organization despite being aware of the risk, is uncertain of its size and impact. In the COVID-19 crisis, there is also a factor of ‘unknown unknown’ risk which no one could have predicted and its impact remains dynamic and uncertain. When such risks emerge, the ability of the organization to react with agility is of essence. It’s like a goalkeeper trying to defend shots from a star studded opposing team. If you save a goal, it is a part of your job. If you let a goal in, it is a potentially fatal mistake…

This interplay of risks will continue in the foreseeable future.

What are the implications for banking?

For all stakeholders, especially those in the SME banking space, it is extremely critical to arrive at the Goldilocks position: A pressing balance of risk vis-à-vis growth in these uncertain, moving target times. So the question on everyone’s mind is:

‘How we can continue to achieve a win-win situation for all?’

What is that ONE thing which will help us?

I remember receiving a message as a WhatsApp forward a few days back. It depicted 4 pictures of the same house, but viewed from different lenses: landlord, tenant, property valuer and tax department. The image showed how each stakeholder perceived the house’s underlying value suited to his/her point of vantage. There was another one where Virat Kohli’s picture was shown - a real one on how the RM views a proposal, another a fake one (someone who looks like him) depicting how a credit person views a proposal.

While the pictures were to convey humour, it inadvertently hit the nail on the head. Let’s apply it in the banking scenario. When a firm applies for a loan and the bank evaluates it, everyone involved in the process has access to same set of data. We however may interpret the scenario differently. For instance, a borrower may talk about resiliency - how it managed to steer the ship despite the environment and expects a favourable risk category. The bank may evaluate risks from a more holistic way considering macro-economic, other external and internal factors.

So, the question is how do we converge, while providing our individual divergent views?

One thing which will help us next level of collaboration. For risk management, I call it data driven collaboration.

While various stakeholders have been working together, COVID-19 provides an excellent opportunity to raise the bar. One of the critical components of this journey would be forming a joint hypothesis based on hard facts rather than opinions.

Let’s do a deep dive.  

Today, there is no dearth of data for risk assessment. Data on a company’s financials, credit score, negative news, social media activities, GST, CRILIC, export-import data, stock statements, macro-economic, etc. are widely available on your fingertips. It is now critical to carve out a narrative for the borrower based on a common understanding of the scenario and underlying data. The end objective of the exercise should be to arrive at a mutually beneficial outcome for all.

So, what are the key success factors?

There are primarily 3 personas in the entire loan journey.

All 3 cogs need to interact more effectively. Let’s understand a few levers:

1. Agility

Just like in software development, risk assessment is transitioning from a pure waterfall approach to an agile one. Data is more fluid than ever before. In times of COVID-19 and beyond, I see a need to assess event-driven checkpoints to augment more traditional reviews done at specific fixed time milestones. For instance, we have been reviewing data at month/quarter/ year end. Can we also look at events and their implications on borrowers- for e.g.: What is the impact of unlock phase 3 on their business? How has the company’s international business performed in countries that have re-enforced lockdown? This blended approach can provide a more realistic picture of the business’ performance and help in a more accurate and holistic assessment.

Many events are qualitative in nature. Borrowers and assessors need to work together to quantify their impact together. All of us need to be agile enough to dynamically adjust our models, as nature of the events and their underlying signals change.

2. Open-mindedness         

In risk, you should be willing to be challenged and proven wrong. Agility needs us to be iterative, open to learn more, re-assess our hypothesis and pivot. Every persona must be willing to adapt, and learn from perspectives of other two. Risk has been historically an inward looking function drawing conclusions from deals done in past. However, various financial crises have shifted the need for personas to be more forward looking and futuristic in thoughts. Speaking to customers, and developing empathy which are the hallmarks of great business management are applicable to risk too. Further, the personas also need to be willing to constantly up-skill themselves in technology, and view it as a partner in business growth. This can be combined with judgmental aspects, for better decision making.

3. Simplicity

Risk is also about sticking to the basics. In fact, in my observation, whenever you neglect the basic rules of risk management, it punishes you. Sometimes too much data on micro and macro-economic parameters results in noise. It is critical to identify the right indicators, agree with all stakeholders and convey their impact in a simple and lucid manner.

2. Effective communication

This is the mother of all, and draws from previous points. Open and continuous dialogue across 3 personas is very critical for effective collaboration. The approach of identifying risks needs to be more forward looking, and solution oriented to address issues identified in the growth story.

So, how do we start?

All 3 personas would need to contribute in the journey. Here are a few things to start with:

In risk management, the question ‘Why risk’ is a no-brainer. Other questions: ‘What to assess in risk?’ and ‘How to assess?’ have changed drastically over years, and more so in the last 4-5 months. The key to manage risks in uncertainty is to communicate in a simple, yet effective manner. Collaboration has been a winning proposition across business segments for ages - let’s embrace it for risk too.

Let’s work together.

Co-authored by Prakash Jaiswal (SME Banking), Shekhar Lele (Digital & Innovation) and Ankita Nirola (Credit Risk Management) from HSBC India.