Avoid the 24% NPL Crisis with Robust Servicing

The UK's Accelerating Business Lending Landscape: Opportunity and Risk

The UK business lending market is experiencing a remarkable upswing, with high street banks increasing their lending to £4.6 billion in Q1 2025. This marks the sixth consecutive quarterly rise and represents a 14% annual increase, driven primarily by growth in agriculture, manufacturing, retail, and health sectors. Lending to smaller businesses with annual turnover less than £2 million has been particularly robust, while medium-sized businesses have seen a 9% increase in funding access. New loans and overdraft approvals are up 37% and 8% respectively compared to Q1 2024 [1].

This sustained growth creates unprecedented opportunities for lenders to expand their portfolios and market share. However, it simultaneously introduces heightened risk of non-performing loans (NPLs) if proper monitoring and servicing infrastructure isn't established. As lending volumes increase, so does the potential for loan deterioration without adequate oversight systems.

The broader UK lending environment is experiencing significant momentum. According to the Bank of England's latest data, UK non-financial businesses borrowed a net £1.8 billion from banks and building societies in March 2025, following net repayments of £0.5 billion in February. This includes £1.7 billion borrowed by large non-financial businesses and £0.1 billion by SMEs [17]. The EY ITEM Club projects that bank lending to UK businesses will grow by 4.5% in 2025, marking the strongest growth since 2020 [18].

This expansion is occurring against a backdrop of increasing market complexity. Challenger and specialist banks now account for 60% of gross lending to smaller businesses, surpassing the UK's big five banks for the fourth consecutive year. Of the £62.1 billion gross lending to smaller businesses in 2024, £37.3 billion was provided by challenger and specialist banks, marking the highest share on record [19].

The current lending expansion is occurring against a backdrop of economic uncertainty, prolonged inflation, and exchange rate volatility—factors that further complicate risk assessment and management. As highlighted by recent industry analysis, corporate banks are navigating an increasingly complex risk environment, with these economic factors exacerbating the challenges of maintaining portfolio quality [2].

Legacy Loan Servicing Systems: The Hidden Vulnerability in NPL Prevention

Despite the sophisticated front-end technologies deployed in loan origination, many UK lenders continue to rely on outdated loan servicing infrastructure that represents a significant vulnerability as they expand their business lending portfolios. These legacy systems, often built on manual processes and siloed data, create dangerous blind spots in risk monitoring that can allow deteriorating loans to progress undetected until they become non-performing.

"Legacy loan servicing systems, often siloed and built on manual processes, were not designed to meet the demands of modern banking," according to recent industry analysis. "These outdated systems introduce delays, increase operational risks, and limit visibility, especially in managing high-volume bilateral loans or complex syndicated loans" [2].

The limitations become particularly problematic as lending volumes increase. Manual monitoring processes that might have been manageable with smaller portfolios become overwhelmed as loan books expand, creating perfect conditions for early warning signs to be missed. The result is a growing gap between the sophisticated risk assessment conducted during origination and the limited ongoing monitoring capabilities of legacy servicing systems.

What makes this vulnerability particularly insidious is that loan servicing is often viewed as a 'back-office' function rather than a critical control point for NPL prevention. Yet it is precisely in these operational processes that the earliest indicators of loan deterioration can be detected and addressed before they progress to non-performing status.

The Economist Impact and Swift have highlighted that corporate banks are navigating an increasingly complex risk environment, with rising economic uncertainty, prolonged inflation, and exchange rate volatility exacerbating the issue. As lending becomes more complex and regulated, servicing must evolve to ensure a seamless loan life cycle, enhancing customer engagement and streamlining operations [2].

The Bangladesh Cautionary Tale: Systemic Failures Leading to 24% NPL Crisis

While the UK lending market currently enjoys growth and relative stability, the catastrophic banking crisis unfolding in Bangladesh offers a stark warning about how quickly NPL rates can escalate when proper servicing infrastructure is lacking. Bangladesh's banking sector has collapsed under the weight of a staggering 24.13% NPL rate—meaning nearly one in every four taka lent by banks has gone bad [3].

The scale of the crisis is breathtaking. Classified loans in Bangladesh's banking industry have surged by approximately Tk 750 billion in just three months, pushing total NPLs to a record Tk 4.20 trillion by the end of March 2025. This represents a dramatic deterioration from the 11.11% NPL rate recorded just one year earlier. The situation is even more dire in state-owned banks, where defaulted loans constitute an alarming 45.79% of outstanding loans [3].

What makes the Bangladesh case particularly relevant for UK lenders is how rapidly the situation deteriorated. The doubling of NPL rates in just one year demonstrates how quickly loan portfolios can deteriorate when proper monitoring and early intervention capabilities are absent. This acceleration occurred despite the Bangladesh Bank's efforts to implement stricter loan classification standards, including reducing the overdue loan classification period from nine months to six months, with plans to further shorten it to three months [3].

"The Bangladesh banking industry's NPL rate reached 24.13% by March 2025, highlighting the consequences of inadequate loan monitoring and servicing." [3]

The Bangladesh example illustrates how systemic weaknesses in loan servicing and monitoring can undermine even well-intentioned regulatory reforms. Without robust operational infrastructure to identify and address deteriorating loans early, regulatory changes alone proved insufficient to prevent the crisis.

Technology-Driven Early Warning Systems: The Foundation of NPL Prevention

As UK lenders navigate the current growth phase in business lending, advanced early warning systems powered by AI and automation represent the frontline defence against NPL accumulation. These systems enable lenders to identify deteriorating loans at the earliest stages, implement targeted intervention strategies, and maintain portfolio health even as lending volumes increase and economic conditions fluctuate.

The financial sector increasingly recognises technology's critical role in managing complex risk environments. A recent industry survey revealed that 85% of financial institutions are excited by rapid technological change and the opportunities it presents for their organisations, particularly in areas like AI and automation that can help navigate increasing complexity in risk management [2].

"Artificial Intelligence (AI), Machine Learning (ML), and robotic process automation (RPA) are revolutionising the lending industry, with financial institutions increasingly using these technologies to enhance operational efficiency and reduce costs," according to recent industry analysis [20]. FullCircl has found that AI can significantly improve lending outcomes by integrating AI into workflows and creating customised financial solutions based on customer behaviour, credit history, and financial health. This includes identifying loans at risk of default early, supporting clients and protecting their risk thresholds [20].

Effective early warning systems monitor specific indicators that signal potential loan deterioration. These critical indicators include:

• Payment Patterns: Monitoring changes in payment behaviors, such as delayed payments or reduced payment amounts, which often provide the earliest signals of financial distress
• Income Fluctuations: Tracking variations in borrower income streams that might impact repayment capacity
• Changes in Credit Usage: Observing shifts in how borrowers utilize available credit across their financial relationships

AI-powered early warning systems offer several distinct advantages over conventional monitoring methods. By leveraging real-time data and advanced analytics, these systems provide dynamic risk assessments that allow lenders to take preemptive actions before loans deteriorate significantly.

The implementation of AI and machine learning in loan management has transformed how financial institutions approach risk assessment. These technologies enable more accurate credit risk assessments and operational efficiencies throughout the lending lifecycle. By analyzing vast amounts of data and identifying patterns that might escape human analysts, AI systems can detect subtle signs of deterioration and flag at-risk loans for intervention before they become problematic.

The Shift to Non-Bank Lending: Implications for NPL Risk Management

The UK lending environment has undergone a significant structural transformation, with a substantial migration of SME lending from traditional banks to non-bank lenders. Since 2014, 36 new banking licences have been issued to SME lenders, reflecting this shift in the market. However, despite this proliferation of lending options, the current state of the UK lending landscape is not adequately supporting the ambitions of current and future SMEs [4].

This market evolution creates both opportunities and challenges for NPL risk management. Non-bank lenders often bring innovation and flexibility to the market, potentially serving segments that traditional banks have retreated from. However, they must implement equally robust—if not superior—loan servicing infrastructure to manage NPL risks effectively as they capture increasing market share.

The Bank of England's 2024 SME Finance Survey revealed a concerning trend: 77% of SMEs would prefer to grow slowly rather than borrow to expand at a faster rate [4]. This risk aversion among businesses, combined with the UK having one of the lowest levels of borrowing by non-financial businesses as a percentage of GDP among G7 countries, represents a structural weakness that constrains investment, productivity, and long-term growth.

For non-bank lenders seeking to address this gap in the market, establishing sophisticated loan servicing capabilities from the outset becomes even more critical. Many of these newer market entrants may be serving segments with inherently higher risk profiles, making robust monitoring and early intervention systems essential to maintaining portfolio quality.

Despite these challenges, there are positive signs in the UK lending market. A survey conducted by Smart Money People has found that mortgage advisors in the UK have expressed their highest levels of satisfaction with lenders in five years, with satisfaction scores rising to 4.22 out of a maximum 5.4 [21].

Regulatory Evolution and NPL Classification: Preparing for Stricter Standards

UK lenders must prepare for the likelihood of evolving regulatory standards around NPL classification and management, particularly as global regulators respond to financial stability concerns. The trend toward stricter loan classification standards seen in markets like Bangladesh reflects a global regulatory direction that UK financial institutions should anticipate.

The Bangladesh Bank's revision of the overdue loan classification system—reducing the tenure from nine months to six months, with plans to further shorten it to three months by March 31, 2025—exemplifies this regulatory trajectory [3]. Shorter classification periods require more sophisticated monitoring and intervention capabilities to prevent loans from crossing regulatory thresholds into NPL status.

Recent developments in the UK regulatory environment underscore this point. A report by the House of Lords Financial Services Regulation Committee has called for sweeping reforms, arguing that regulators need to set out plans to address longstanding concerns with the redress framework and ensure their views on regulatory requirements are consistent. The 148-page report highlighted issues within the regulatory environment, including high compliance costs and a lack of clarity under the Consumer Duty [22].

Proactive adoption of robust loan servicing systems positions lenders to adapt seamlessly to regulatory changes while maintaining portfolio quality through economic cycles. Institutions that wait for regulatory mandates before upgrading their monitoring infrastructure risk finding themselves unable to comply with new standards without significant disruption to their operations.

Moreover, regulatory preparedness extends beyond mere compliance to competitive advantage. Lenders with advanced servicing capabilities can confidently expand into new market segments or increase lending volumes, knowing they have the infrastructure to maintain portfolio quality regardless of regulatory evolution.

Implementation Challenges and Change Management Strategies for UK Lenders

UK lenders face several specific challenges when transitioning from legacy loan servicing systems to integrated platforms. These challenges include data migration complexities, operational disruption risks, staff adaptation requirements, and integration with existing systems. Understanding these challenges and developing effective transition strategies is essential for successful implementation.

One significant challenge is the integration of new loan management systems with existing core banking infrastructure. Successful integration with existing core banking systems is critical to creating a modern digital platform that enhances efficiency and improves the lending experience.

Another key challenge is managing the operational transition without disrupting ongoing lending activities. Financial institutions must carefully plan their implementation approach to ensure business continuity throughout the transition period.

Staff training and adaptation represent another significant hurdle. Financial institutions must invest in comprehensive training programs to ensure staff can effectively utilize new systems and adapt to changed workflows. This human element of the transition is often underestimated but is crucial for realizing the full benefits of new loan management platforms.

Effective change management strategies include:

• Leadership Alignment and Sponsorship: Securing visible support from senior leadership to champion the change and demonstrate its strategic importance
• Stakeholder Engagement: Involving key stakeholders from across the organization in the planning process to ensure buy-in and address concerns early
• Clear Communication Plan: Developing a comprehensive communication strategy that explains the rationale for change, expected benefits, and implementation timeline
• Training and Support: Providing thorough training programs tailored to different user groups, with ongoing support resources available during and after implementation
• Change Champions Network: Identifying and empowering change advocates within different departments to help drive adoption and provide peer support
• Phased Implementation: Adopting a staged approach that gradually transitions different components or portfolios to the new system, minimizing operational disruption
• Feedback Mechanisms: Establishing channels for users to provide feedback on the new system and implementation process, allowing for continuous improvement

Successful implementations often combine technical transition strategies with robust change management approaches. These include comprehensive planning, data mapping and cleansing, parallel running of systems, dedicated transition teams, and close vendor partnerships to leverage implementation expertise.

Integrated Loan Management Systems: The Operational Backbone of NPL Prevention

A comprehensive, integrated loan management system serves as the operational backbone for effective NPL prevention, connecting origination, underwriting, monitoring, and servicing in a seamless workflow. This integration enables consistent risk assessment, real-time portfolio visibility, and coordinated intervention strategies that maintain loan performance throughout the credit lifecycle.

"As lending becomes more complex and regulated, servicing must evolve to ensure a seamless loan life cycle, enhancing customer engagement and streamlining operations," notes recent industry analysis [2]. The increasing complexity of lending operations demands integrated systems that connect all phases of the loan lifecycle. Siloed approaches to loan management create blind spots and inefficiencies that directly contribute to NPL risk, particularly as lending volumes increase and economic conditions become more volatile.

Recent case studies demonstrate the tangible benefits of implementing integrated loan management systems:

In the UK specifically, financial institutions are setting their sights on growth through technology investment. Lloyds' latest Financial Institutions Sentiment Survey, which gathered views from over 100 senior leaders across banking, insurance, asset management, and private equity, found that firms are preparing to expand and invest in key areas such as AI, digital infrastructure, and workforce skills. Over half of firms expect their business to grow in the next year, with this figure rising to 83% over a five-year period. Additionally, 37% plan to increase capital spending over the next 12 months [23].

kennek's end-to-end lending platform exemplifies this integrated approach, providing UK lenders with a unified system that eliminates the operational gaps where NPL risks typically develop. By connecting origination, underwriting, monitoring, and servicing in a single platform, kennek enables consistent risk assessment and real-time visibility across the entire loan lifecycle.

This integration is particularly valuable for lenders expanding their business lending portfolios, as it allows them to scale operations without proportionally increasing headcount or operational risk. The platform's automated monitoring capabilities identify early warning signs of loan deterioration, enabling timely intervention before loans progress to non-performing status.

Conclusion

The UK business lending market presents significant growth opportunities, with six consecutive quarters of expansion and a 14% annual increase in lending volumes [1]. The broader market momentum is evident in the Bank of England's data showing £1.8 billion in net business borrowing in March 2025 alone, with the EY ITEM Club projecting 4.5% growth in business lending for 2025—the strongest since 2020 [17][18].

However, this growth brings heightened NPL risk that requires robust servicing infrastructure to manage effectively. The catastrophic 24.13% NPL rate in Bangladesh serves as a stark warning of how quickly loan portfolios can deteriorate without proper monitoring and early intervention capabilities [3]. UK lenders must heed this cautionary tale by implementing integrated loan management systems that connect origination, underwriting, monitoring, and servicing in a seamless workflow.

Advanced technologies, particularly AI-powered early warning systems, provide the foundation for effective NPL prevention. As industry analysis confirms, "AI can significantly improve lending outcomes by integrating AI into workflows and creating customised financial solutions based on customer behaviour, credit history, and financial health," including "identifying loans at risk of default early" [20]. By monitoring specific indicators such as payment patterns, income fluctuations, and credit usage, these systems can detect potential problems before they escalate into non-performing loans.

The implementation challenges UK lenders face when transitioning to integrated platforms—including data migration complexities, operational disruption risks, and staff adaptation requirements—can be overcome through effective change management strategies. These include leadership alignment, stakeholder engagement, clear communication, comprehensive training, and phased implementation approaches that minimize disruption while maximizing adoption.

How can lenders best prepare for the evolving regulatory landscape while maintaining portfolio quality? The answer lies in adopting flexible, technology-driven solutions that can adapt to changing requirements while providing comprehensive visibility into loan performance. Recent regulatory developments, including the House of Lords' call for clearer regulatory frameworks, underscore the importance of having adaptable systems in place [22].

What specific steps should UK lenders take to implement effective early warning systems? Begin by assessing your current loan servicing infrastructure, identifying gaps in monitoring capabilities, and evaluating technology solutions that provide real-time visibility and automated alerts for early signs of loan deterioration.

By investing in robust loan servicing infrastructure now, UK lenders can safely capitalise on current growth opportunities while protecting portfolio quality through future economic cycles. Platforms like kennek offer the integrated approach needed to scale lending operations without proportionally increasing operational risk, providing the operational backbone for sustainable growth in an increasingly complex lending environment.

The choice facing UK lenders is clear: invest in robust servicing infrastructure now or risk facing the kind of catastrophic NPL rates that have devastated banking sectors elsewhere. Those who choose the former path will be well-positioned to thrive in the evolving lending environment, while those who neglect this operational imperative may find themselves vulnerable to the next economic downturn.

Our Opinion

The current expansion in UK business lending presents clear opportunities, yet it simultaneously elevates the inherent risks associated with portfolio quality. We observe that many lenders, despite sophisticated front-end processes, remain reliant on outdated loan servicing infrastructure. This creates dangerous operational blind spots, allowing potential non-performing loans to develop undetected. We believe this reliance on legacy systems is the primary vulnerability in the face of increasing lending volumes and economic uncertainty; it is simply not fit for purpose in a modern, complex market.

To navigate this environment safely and capitalise on growth, lenders must adopt integrated, technology-driven platforms that connect the entire loan lifecycle. We assert that robust, automated monitoring and early warning systems are not merely advantageous but essential for proactive NPL prevention. Such systems provide the real-time visibility and data-driven insights necessary to identify and address deteriorating loans early. Investing in this end-to-end infrastructure is the decisive step required to scale operations securely, maintain portfolio health, and ensure preparedness for evolving regulatory standards.

References

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