ESG: A deterrent against the erosion of lending standards

Soaring property prices are drawing attention to lending standards as low interest rates facilitate higher leverage for new borrowers, according to S&P Global.  

While growing scrutiny on lending standards is warranted, given Australia's high household indebtedness, S&P Global Ratings does not expect lending standards in the Australian RMBS sector to weaken. 

The growing importance of ESG factors is increasing investors' sensitivity to lenders' social responsibilities, including the fair treatment of borrowers, said S&P analyst Erin Kitson.  

"In a post-royal commission environment, investors are increasingly focusing on environmental, social, and governance factors," she said. 

“The Commission demonstrated this, with many banks facing criticism and hefty penalties for non-compliance with responsible lending standards.  

“Community, regulatory, and investor expectations around responsible lending practices will not abate in a post-covid world. "This is likely to be an important deterrent against any erosion in responsible lending standards." 

The analyst said lending standards generally have strengthened in the Australian RMBS sector since 2014 in response to increased prescriptiveness in regulatory guidelines and the credit rating agency does not expect to see any backsliding. 

As the lending environment becomes more competitive, she noted that lenders are increasingly digitising their processes to accelerate credit decision-making, with nonbanks focusing on underserved loan segments.  

But Kitson dismissed the idea that these pursuits were incompatible with the maintenance of credit quality.  

“Streamlining existing processes to more rapidly process loan applications is a lender's key focus in a low-margin, competitive lending environment,” she said. 

“Faster credit decision making, and prudent lending standards need not be mutually exclusive if technology is leveraged effectively.”  

Tools enhance insights 

Automated credit-decisioning, credit score cards, and automated property valuations are among the tools lenders deploy to expedite credit decision processes.  

“These tools are more frequently deployed to process lower-credit-risk loans, based on our observations of the Australian RMBS sector. Technology can also be used to enhance credit insights by accessing and utilising a wider range of data to complement existing borrower information.” 

Kitson said heightened vigilance is critical in an ultralow interest-rate environment to ensure against a build-up in systemic risk and that debt serviceability remains sustainable throughout economic cycles.  

The S&P credit analyst noted that cybersecurity preparedness is also coming into sharper regulatory focus across the broader financial sector as attacks increase globally.  

“Cyber-risk frameworks need to form part of a lender's broader risk-management frameworks, with clearly documented strategies and programs aimed at increasing awareness to help reduce the risk and severity of incidents." 

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