Pandemic-induced micro transformations in credit analysis and credit risk management

Acuity Knowledge Partners
3 min readJan 14, 2022

Published on November 26, 2021 by Manisha Baid

The financial system was better equipped for crisis management in 2020–21 than it was during past crises. Financial institutions had significantly higher capital ratios and higher provision coverage ratios for non-performing assets (NPAs) than previously. This was partly a result of the regulatory reforms implemented since the global financial crisis of 2008–09. That said, this economic crisis is the first to have elements of both demand and supply shocks.

Banks globally did not have a playbook to deal with the pandemic-induced disruption, but given the importance of the financial sector in ensuring a recovery, banks continued to lend, to keep businesses from closing down and further slowing down the economy. The pressure from increased lending to struggling sectors, combined with low net interest margins (NIMs), slowing economies and distressed borrowers, stifled banks’ performance. As a result, banks focused on pre-emptive and robust credit risk management practices.

The required changes we are noticing in the aftermath of the pandemic can be broadly categorised into three sections — increased depth, frequency and speed of credit analysis.


  • Increasing borrower- and portfolio-level analysis, with in-depth assessment of the pandemic’s impact on business performance, business strategy, industry outlook and underlying risks
  • Growing focus on building more variables into credit risk models while keeping a check on the traditional probability of default (PD) and loss given default (LGD) models
  • Building multi-pronged and multi-weight forecasts based on cash flow, liquidity, recovery time frame and revised budgets
  • Developing comprehensive sector-specific key risk indicators based on sectoral trends and exposures
  • Increasing emphasis on qualitative factors such as recent events, corporate actions and related news on the industry and company


  • Frequent monitoring of data on liquidity of sectors more vulnerable to demand shocks due to a crisis
  • Increasing monitoring requirements from once a year to once a month/quarter due to an uptick in risk rating downgrades and significant portions of the portfolio being downgraded to stressed credit levels
  • Close monitoring of covenants, with a sharp focus on credits with deteriorating headroom, and incorporating a watch list to track sharp periodic declines in performance


  • Immediate/instant reporting of breaches and loans newly added to the watch list
  • Using artificial intelligence/machine learning technology to collect and feed data to accelerate the decision-making process
  • Meeting ever-increasing demand for faster credit approval while conducting critical credit quality checks to meet urgent liquidity requirements during economic crises

How Acuity Knowledge Partners can help

We understand a generic approach may not work amid a crisis and that developing a bespoke risk-integrated underwriting solution will address the need for depth, frequency and speed, and be key to achieving operational efficiency and profitability, given the vast scale of and complexities in banks’ underwriting and monitoring processes.

Key micro transformations we facilitate are listed below:

  • Centralising and standardising data infrastructure and building links between all internal and external data sources
  • Adopting a risk-based underwriting approach for non-bespoke products (more prevalent in the middle market and business banking space)
  • Direct processing by building automated underwriting systems (primarily for retail loans) by complementing data generated from in-house banking systems with third-party offerings
  • Using alternative credit data for improved risk decisions. Making this data available through application programming interfaces (APIs) helps in almost-real-time input of information critical for underwriting decisions
  • Minimising defaults by proactive portfolio monitoring — developing early warning systems with tailor-made, sector-specific triggers and headroom indicators, current and predictive credit scoring and remediation strategies
  • Most importantly, building excellent relationships within the client’s credit, underwriting and monitoring teams, reducing lead time in decision making

About the Author

Manisha is part of the Commercial Lending Projects and Transition team at Acuity Knowledge Partners. She has over 13 years of experience in transitioning and leading teams and projects for commercial and investment banking clients. Prior to Acuity, she worked as an equity capital market analyst at Goldman Sachs and as an offshore investment banking analyst for Bear Stearns. She holds an MBA in Finance from MDI, Gurgaon and a Bachelors in Commerce from Shri Ram College of Commerce, Delhi

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Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.