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Digital financial tools can improve credit risk management: World Bank report

Developing countries face growing risks from financial fragility created by the Covid crisis and non-transparent debt, says a World Bank report.  

According to World Development Report 2022: Finance for an Equitable Recovery, risks may be hidden because the balance sheets of households, businesses, banks, and governments are tightly interrelated. Today, high levels of non-performing loans and hidden debt impair access to credit, and disproportionately reduce access to finance for low-income households and small businesses. 

“Tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery,” said World Bank Group President David Malpass. 

“It is critical to work toward broad-based access to credit and growth-oriented capital allocation. This would enable smaller and more dynamic firms – and sectors with higher growth potential — to invest and create jobs,” he said. 

According to the report, digital financial tools and products can play a critical role in assessing borrower risk and providing recourse in the event of default, thus improving the management of credit risk, enabling lending, and fostering new economic opportunities

The policy reforms necessary for achieving an equitable recovery also offer governments and regulators an opportunity and roadmap to accelerate the shift toward a more efficient and sustainable world economy. Well-designed crisis response policies and longer-term reforms can encourage capital flow toward greener firms and industries. 

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