Data for debt relief offers coronavirus NPL solution but must be handled with care
When mortgage payment holiday schemes start to run out at the end of the year, there looms a genuine risk of a wave of defaults. Allowing investors access to borrower-level data may be the only way banks can clean up their balance sheets and maintain lending to the real economy but it is fraught with hazard and must be deftly handled.
As the Covid-19 liquidity schemes begin to run out, some forecasters predict bank profits could drop by 42% this year and not recover until 2024. Any bank with nearly half its cash tied up in defaulted loans is one which can’t keep on lending into the real economy.
The bank can sell those non-performing loans (NPLs), or securitize them. But because the borrower data is kept closed off in different areas of the bank, traditional investors such as pension funds stay away from NPL portfolios because they cannot get a clear picture of who will pay back the loan and who won’t.
By allowing investors access to such data, banks could get a much better price for their portfolio sales, allowing them to clear out the defaulted assets and carry on lending to the real economy, which is what the coronavirus liquidity schemes were set up to do in the first place.
This would also allow banks to offer support to customers struggling to pay back their debt, by offering them the option selling access to their data in exchange, perhaps, for better credit terms, it has been suggested.
Allowing customers the option of selling access to their data for this purpose, particularly those at their most vulnerable, is a rightly controversial idea.
Many would point to the Cambridge Analytica scandal, or other issues around privacy and the abuse of data that dog the tech sector, and ask whether it is prudent to risk exposing customers' sensitive financial information like this.
If data sharing is to be used to offer a smarter way out of NPLs, then it is obvious that legislation protecting customer financial data is needed and that it must ensure two things. First, that only customers who have defaulted on loans can be offered a data for debt relief exchanges, in order to prevent mass sweeping up of any and all data. Secondly, that breaches of the rules, both in letter and spirit, in terms of misuse, selling or sharing of the data be met with excoriating fines, revoked trading licenses at a corporate level and even criminal charges against the guilty individuals.
The data would need to be anonymised, aggregated financial data — not sufficient to identify an individual customer. It could include items like spending habits, income, and outstanding debt — sufficient to entice new investors, who would have to justify the collection to their regulator.
Banks already collect this data but it is sectioned away behind Chinese walls. Expedient breaches of these walls, governed by the strictest of rules banning inappropriate use or sharing of the data and granted only for as long as it takes to complete a deal, would not be too much of a jump from current practices.
Such a scheme, although controversial, would offer lenders and borrowers a way out of trouble.
Compared to the volume of other personal data traded back and forth by tech companies, this would be much less. And the sharing of this data would hopefully have some direct benefit to the people it concerned rather than just to, say, social media behemoths, advertisers and political consultancies. Ultimately, the real beneficiary would be the taxpayer and the economy as finance was freed up, helping growth.
Without such a drastic change in the permeability of financial data, banks will once again see their balance sheets filling up with defaulted loans.
Leaving anonymous data closed away benefits no one. But by granting borrowers control over who uses their information and who doesn’t, data could become a resource controlled by those who own it in the battle against the economic ravages of the coronavirus.