Economic Impacts on Credit Risk Management of Leasing and Factoring Companies in Germany

The leasing and factoring industry is facing significant changes in the economic environment following the Covid19 crisis. Since 2022, Russia's war of aggression on Ukraine has kept the global economy on edge with significant consequences:

• Increased energy prices led to significant cost increases for businesses and households.
• High inflation weighed on private purchasing power and the procurement of goods and raw materials.
• Interest rate developments made financing more expensive.
• Supply chains were disrupted.

Despite the crisis, the German economy grew by 1.9 percent in 2022 in price-adjusted terms.

Although the outlook for 2022 as a whole is still positive, it should be noted that the economy stagnated in the fourth quarter of 2022. Companies are currently benefiting from high order backlogs that are slowly being worked off and resulting in sales. However, the volume of new orders is declining and energy will remain sustainably expensive. Cost increases in the procurement of materials and raw materials are also to be expected.

In addition, high interest rates put a strain on corporate financing, as they rose by more than 300 basis points last year. This was a considerable interest rate shock, especially considering that BaFin considers a jump in interest rates as critical as 200 basis points. A de facto interest rate increase of 3 percent makes it considerably more expensive for companies to finance investments and procure materials and raw materials.

Creditreform, the credit reporting agency, published at the end of last year that insolvencies had risen again for the first time since 2009. Around four percent compared with the previous year, in other words, Creditreform expects 14,700 corporate insolvencies in 2022. Ten years earlier, the insolvency level was around 28,000. In addition, initial indicators, such as payment arrears by borrowers, are already pointing to increased insolvency risks at individual financial institutions.

In the past ten years, default risks have been low, and even during the Corona crisis, insolvencies were at a low level thanks to extensive government aid. In view of the negative influencing factors, increased attention is now needed in credit risk management. In this still early phase, the causes of credit risks must be analyzed and monitored comprehensively and continuously. Differentiated measures for risk management and risk hedging must be identified quickly and implemented swiftly.

This requires good IT support in order to continuously evaluate historical and, in particular, current data, including early warning indicators from internal and external databases. The resulting adjustment of the respective credit policy and rapid implementation of credit risk management measures are of central importance. Measures relate to both existing and new business.

As a rule, credit risks do not have an across-the-board impact on all sectors but tend to show up earlier in some sectors and later in others. In addition to looking at individual risks, it is therefore essential to analyze them on a sector-by-sector basis. The knowledge gained from this is necessary above all for rule-based decisions in new business, but also for risk-reducing measures in existing business.

For the management of the entire credit portfolio, it is necessary that the data is always available and is managed in the sense of a balanced portfolio. Country- and sector-based portfolio analyses as well as further clustering, e.g., by customer group, create the necessary transparency for the orientation of credit policy.

Banks and financial institutions want or need to be able to quickly adapt rule-based decision-making processes. Software solutions in the area of risk management used in leasing and factoring must meet this need by enabling rapid adaptation of rules in addition to efficient decision-making processes.

Furthermore, leasing and factoring companies have growth opportunities in 2023 and can significantly support the overall economy.