How AQR will teach banks to manage data

Evgeny Scherbinin, CEO of Prime Source

Kazakhstani banks have received the long-awaited, if still interim, results of the AQR. I am confident that the amounts of additional provisions required will be a subject of discussion between bankers and the regulator in the coming weeks.

Having delivered projects to automate risk calculation and provisioning since 2010, we have more than once provided technical and mathematical support for the process of substantiating particular calculations under national standards, as well as under IAS 39 and IFRS 9. I have no doubt that the resulting reports will contain a vast number of requirements and recommendations regarding processes, accounting, reporting and analytics in lending.

As is known, the National Bank's team and the consultants it engaged examined various aspects of the loan portfolios of 14 domestic banks. They looked at the methodology of the lending process and how it is actually applied, the loan life-cycle processes in a bank's accounting and the maintenance of credit files and collateral; they also studied the calculation of loan quality indicators and of provisions. These and other business processes have a serious impact on loan portfolio quality, profit and the shareholder value of a financial institution. Conversely, a lack of proper attention, or unjustified savings of time and money, creates risks to the financial stability of the individual bank and, in certain circumstances, of the system as a whole.

To secure portfolio quality and bank profitability on the one hand, to meet the regulator's requirements and recommendations on the other, and to take care of their clients as well, all banks will need to upgrade their information systems substantially and to adopt new technologies. In effect, the AQR is digitalizing Kazakhstan's banking industry.

The main purpose of all these upgrades will be the accurate, high-quality and detailed collection of all information on every step of the lending process. Banks need to record and retain the history of every client request, of all the information and financial statements submitted and of all the publicly available information about the borrower at each point in time. Drawing on the accumulated body of information and using mathematical modeling techniques, they need to forecast the probability and materiality of the borrower's indicators and take appropriate action. These responses to changes in a borrower's financial condition must be proactive, and open sources of reliable information already exist that make it possible to take a timely decision automatically.

Banks that take a constructive view of the AQR results will strengthen the foundations of a modern, data-driven business and will be the most efficient and competitive.

Kursiv, No. 6 (830), 20 February 2020