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How Digitisation helps you tackle IFRS 9 Challenges

The economic fallout of COVID-19—coupled with the new IFRS 9 requirements—has accelerated the need for digital transformation within collections. This article explains why.

  • IFRS 9 requirements mean that institutions must recover outstanding debts as quickly as possible. This is especially important in the wake of the COVID-19 pandemic.
  • The total value of non-performing loans (NPLs) across Europe could reach €1.4 trillion by the end of 2022.
  • AI-driven collections software can accelerate the rate of recovery by as much as 30% in the first 2 weeks within 30DPD.
  • Digitisation and behavioural analytics can improve both the amounts collected and the number of loans written off by around 20%-30%.

COVID-19 caused a global tightening of the purse strings, with organisations slowing down spending due to the economic impact of the pandemic. IFRS 9 requirements also solidify that rising NPL volume will have a significant effect on financial reporting.

IFRS 9 requires early recognition of impairment losses. Entities must make weighted calculations that predict how likely it is that a loan will become permanently devalued. In other words, if it will become an impairment loss.

The difference between IFRS 9 policy and the old IAS 39 is that IFRS 9 requires financial organisations to predict comparably correct reserves for their expected credit losses (ECLs). By holding banks and financial institutions accountable for their ECLs, these institutions will therefore have less money available to spend on other investments.

The following graph demonstrates that under IFRS 9 requirements, institutions have to hold far greater reserves earlier for their expected credit losses than when they followed IAS 39 regulations.

The differences between IFRS 9 and IAS 39

The key is to prevent Stage 1 assets (performing loans) from either becoming Stage 2 (underperforming) or Stage 3 (non-performing). Once an asset reaches Stage 2 or Stage 3, institutions have to hold more money in reserve to cover expected credit losses—meaning they can’t lend it out to customers.

With impairment losses set to skyrocket in the aftermath of COVID-19, IFRS 9 requirements pose a substantial challenge to financial institutions. In fact, they even present a challenge to wider post-pandemic economic recovery. Holding more capital in reserve correlates to less available capital available for loans or credit, affecting macroeconomic recovery. It has therefore never been more important to recover outstanding debts as quickly and cost-effectively as possible.

How digitisation eases the workload from new requirements

Digitisation does not just make lenders’ financial reporting more accurate—it also makes their collections teams vastly more efficient.

Increasing visibility at the account level eases the workload of your team who are working diligently to meet the requirements under IFRS 9. They can analyse the wealth of data at their fingertips to rapidly identify Stage 1 assets that are at risk of falling into Stage 2 or Stage 3.

These past-due customers can then be prioritised, with collections department heads quickly devising the ideal outreach strategy based on the customer’s prior behaviour and preferences.

How digitisation assists in reducing impairment of financial assets and accelerates recovery rates

By digitising their collections process, companies can:

  • More easily recognise high-risk assets;
  • Make accurate, data-driven future risk projections;
  • Quickly recover outstanding debts;
  • Better steer customer outcomes.

The implication of IFRS 9 is that both financial institutions & non-financial institutions (NFIs) need to recover debts faster in order to limit increases in the expected losses they must report.

Digitising the complete credit lifecycle and accounts receivable (A/R) processes through account-level management, customer self-service, and AI/ML-driven personalisation can help lenders recover debts faster. This will:

  1. Reduce their required reserve capital for expected credit losses (ECLs)
  2. Increase the available loan volume that they can give out

Digitally-empowered institutions provide past-due customers with a range of potential payment methods to suit their own particular preferences. Some may prefer self-service options, while others would prefer to handle payments over live chat with an agent.

Using data-driven account-level insights, agents can personalise their outreach—tailoring messages according to what resonates with each individual. They can contact past-due customers on their preferred channels, using the tone of voice that works best for them and at a time that suits the customer.

Indeed, by using AI/ML-driven personalisation, self-service customer portals, and software-driven account-level management, collections departments can accelerate their rate of recovery by as much as 30% in the first 2 weeks within 30DPD. Of course, dunning strategies must be tweaked and refined on an ongoing basis depending on a past-due customer’s response (or lack of response).

Digital communication KPIs can be revelatory in this regard. A customer might have initially expressed a preference for communicating over email. However, when an agent digs into their account, they see that none of the 3 emails that your company has sent out has been opened.

Communication KPIs help you dig into customers' behaviour and preferences.

Digital communication KPIs help you dig into customers' behaviour and preferences

As a result, the agent should consider discontinuing email outreach messages and instead opting for another alternative (like SMS messages). Such detailed account-level measurement allows agents to refine their outreach strategy. By recovering older debts faster, institutions can better influence which stage of impairment (within the ECL model) their accounts fall under.

Digital tools, which provide account-level-management capabilities, allow agents to be as granular or as expansive as needed. Institutions can quickly gain insights into their overall loan portfolio performance or drill down into the details relating to one particular past-due customer.

COVID-19, IFRS 9, and NFIs

While IFRS 9 affects financial institutions and banks most heavily, it is not limited in scope to those businesses alone. Non-financial institutions (NFIs) must pay close attention to the requirements stipulated in IFRS 9, and have a strategy for complying with its standards going forward. In the wake of COVID-19, this is especially important.

However, the extent of IFRS 9 requirements on an NFI depends on the nature of the entity’s financial assets. Therefore, NFIs must first know how their financial assets are to be measured and categorised under the first requirement of IFRS 9—for example, insurers also need to be aware of all IFRS 17 requirements. Insurance companies must be mindful of the types of financial instruments they report—especially when it comes to debt versus equity instruments.

Equity instruments, like stocks, are always reported at fair value. Debt instruments (bonds and loans), on the other hand, must be pushed through a Business Model and SPPI test in order to determine if they are fair value or amortised.

Given that debt instruments can often form the majority of financial instruments within an insurance organisation, it is crucial that these institutions pay close attention to their IFRS 9 requirements. Indeed, if a debt instrument is classified as a “simple debt”, an organisation must recognise and proactively account for expected credit loss—just like a financial institution.

In essence, it is equally important for NFIs with diverse assets to digitise their financial operations as financial institutions, and for precisely the same reasons.


The world urgently needs financial institutions to help stimulate the post-pandemic economy. But the IFRS 9 requirements, combined with the widespread moratoria of debt, force financial institutions to build up cash reserves when they could be giving out loans.

Institutions therefore need to recover debts more quickly and cost-effectively, preventing performing loans from becoming underperforming or even non-performing. To do this, they must digitise their collections process.

If you’re ready to digitally transform your collections process, book a demo to begin your journey.

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