Western Banks and Emerging Markets: Lessons and Opportunities

Financial markets were visibly shaken after the credit crisis in 2008, and Western banks were hit the hardest. In Europe and North America, where financially stable banks often have weaker core equity capital bases, non-performing loans shortchanged available capital and cut into profitability.

With Western banks’ capital restricted—and consumers and companies in need of funds—it was emerging-market banks that came to the rescue. Emerging markets supplied the loans being sought and thus recovered quickly from the crisis.

But as some of these loans become delinquent, the relationship between Western and emerging-market banks grows more complex—with lessons and opportunities on either side.

What Emerging-Market Banks Can Learn from the West 

During the crisis, Western banks were slow to recognize the losses from reductions in the value of secured loan collateral. Particularly in industries such as commercial and retail property and retail sales and distribution, banks were unable to dispose of collateral at fair market value. Rather than write down or write-off these loans, banks continued collecting what interest costs they could, believing the devaluation to be a temporary reduction.

Five years later, regulators and auditors—with some encouragement from central banks—are making renewed efforts to ensure that banks reflect the true, current state of the credit risk in their loan books by making adequate prudential provisions, write-downs, and write-offs. 

This, of course, reduces the amount of capital a bank has available for its operating activities, leaving ample opportunity for emerging-market banks to gobble up credit demand in their regions and beyond.

Demand for loans is growing globally, and these banks can take advantage of a new generation of collections technology and best practices to circumvent some of the challenges that troubled their European and North American counterparts.

Emerging Markets Present New Opportunities—and Challenges

In 2012, McKinsey & Company predicted that an estimated 60 percent of the growth in global banking revenues would come from emerging markets over the next ten years. Rising GDP, innovation, and technology are creating new markets, and micro-, small- and medium-sized businesses that were previously “unbanked or underbanked” are now seeking out loans.   

The opportunities for growth are immense, but emerging-market banks are beginning to face some problems of their own. In addition to a recent rise in non-performing loans, some believe emerging-market banks are the next to be hit by a crisis, in a rebalancing measure resulting from a reduction in the U.S. trade deficit.

But emerging-market banks could fall into the same trap their counterparts did: A local currency collapse could constrict bank capital in a manner similar to that Western banks faced in 2008.

The Way Forward for Western and Emerging-Market Banks

Lending institutions anywhere stand to benefit from these opportunities, provided that they bridge credit education gaps among the local population, and ally with government bodies to overcome challenging business environments.  

Furthermore, the introduction of improved arrears and collections processes will help to limit the impact of non-performing loans and currency fluctuations on banks’ bottom lines.

Sound risk management strategies—and the systems to support and implement them—are crucial in parts of the world with strong economic growth and widening demand for commercial and consumer credit. Banks in these markets can benefit by skipping the intermediate evolutionary stages of collections and recovery and adopt next-generation systems that reduce operating costs and consistently improve collections rates. 

The Next Generation of Collections and Recovery 

To learn more about the evolution of best practices in banking collections and recovery, download our free whitepaper, Collections, and Recovery.