The COVID-19 pandemic created an unprecedented challenge for lenders, not because of widespread deterioration in borrower quality, but because of sudden cash flow disruptions affecting millions of households. As financial institutions grappled with rising COVID-19 credit risk, attention turned to the mechanics of credit card aging and how temporary financial hardship could quickly translate into growing credit card delinquency rates. Around the world, banks introduced payment relief programs, but Malaysia’s approach stood out by allowing consumers to convert revolving debt into structured repayment plans through installment loan conversion, offering a potential model for other markets facing similar pressures.
The critical problem about COVID-19 and credit risk is that the households across the world face cashflow issues, rather than credit quality problems. Pumping money into the hands of consumers will certainly help, but given the unknown length and full scope of the problem, credit card agings can falter.
At issue is the credit card aging process. In the U.S. market, for instance, credit card accounts will age to bad debt write-off once they become 180 days contractually past due (For a detailed discussing on the credit loss cycle, please see Mercator Advisory’s report Credit Card Write-off Collections Takes Brains, not Brawn).
Card issuers across the globe are quick to offer deferments; however, this does not necessarily mean agings will freeze. Top issuers, from American Express, Bank of America, Chase, Citi and Discover each have compassionate positions in the U.S., as do many others across the world, such as ANZ (Australia), Barclaycard (U.K.), BNP (France), CIBC (Canada), Itau (Brazil) and to name a few.
But the best proposal so far comes from the country of Malaysia, where Prime Minister Tan Sri Muhyiddin Yassin announced a country-wide solution for the developing market.
Malaysia is a progressive country of 31 million people, classified as an upper-middle-income group by the World Bank. Interestingly enough, only 4% of the market falls below the poverty line. While more than half of the country has a financial account, credit card penetration was only 21% in 2017. But top banks, including CIMB and Maybank, have been aggressively advancing financial inclusion with the help of the Malaysian Central Bank.
The country’s solution to the cash flow issue uses a classic credit solution for cash-strapped customers: forestall aging, and convert the revolving debt into an installment loan. The Edge reports:
Prime Minister Tan Sri Muhyiddin Yassin has announced a six-month postponement of loan repayment and restructuring of credit card balance and business loans following the COVID-19 outbreak involving at least RM100 billion.
“People of all walks of life whether entrepreneurs, farmers, fishermen, daily workers are wondering about their economic position.
“Among the major concerns raised are the repayment of bank loans, both in the case of private borrowers and Small and Medium Enterprises (SMEs) whose businesses have been affected by the outbreak,” he said in a statement today.
Beginning on April 1, local banks will offer a moratorium or postponement of repayment up to six months to individual borrowers and SMEs during this very difficult time, according to the Prime Minister.
For credit cardholders facing financial constraints, they may choose to convert their credit card balance to term loans.
Borrowers can take advantage of the flexibility of the postponement to defer their credit card repayments from April 1 to December 31, 2020, he said.
The conversion from revolving credit to an installment loan has been used anecdotally over time, but Malaysia appears to be the first to invoke the strategy here.
This solution can work well in every market. One alternative that central banks could offer would be even simpler: extend the write-off mandate by “x” months. In the U.S., this would mean that instead of 180 days as a write-off standard, advance the limit to 240 days.
Credit card issuers must plan ahead. Right now, agings have not advanced, but beginning in April 2020, 30 day delinquency will start to grow; unresolved credit card accounts in May will fall into the 60 day bucket, on the way to write-off in 4Q20.
As economic uncertainty persisted, regulators and lenders faced difficult decisions about how to manage rising delinquency without creating long-term damage to consumers and the financial system. Strategies such as extending credit card aging timelines, providing payment moratoriums, and encouraging installment loan conversion offered practical ways to address short-term cash flow challenges while reducing the risk of escalating credit card delinquency. Whether through regulatory flexibility or innovative repayment programs, managing COVID-19 credit risk required solutions that recognized the difference between temporary financial stress and permanent credit deterioration.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
