Credit Risk Management for Canadian Banks Under Canada’s Immigration Programs
As the world becomes more interconnected, the mobility of a global workforce has emerged as a prominent trend for international labor markets. Canada’s population recently crossed the threshold of 40 million largely due to robust immigration policies.
The main programs supporting international labor mobility in Canada are the International Mobility Program (IMP), and the Temporary Foreign Worker Program (TFWP). The IMP allows Canadian employers to hire foreign nationals without the need for a Labour Market Impact Assessment (LMIA).
Combined, these two temporary work programs account for more than 600,000 foreign workers expected to relocate to Canada in 2023. When added to the permanent residency stream, (465,000 expected in 2023) more than one million international workers are expected to relocate here this year.
For the Canadian banking industry, lenders must be in a position to accurately assess the creditworthiness of a growing immigration market, the primary source for future customer acquisition and growth.
As the world becomes more interconnected, the mobility of a global workforce has emerged as a prominent trend for international labor markets. Canada’s population recently crossed the threshold of 40 million largely due to robust immigration policies.
The main programs supporting international labor mobility in Canada are the International Mobility Program (IMP), and the Temporary Foreign Worker Program (TFWP). The IMP allows Canadian employers to hire foreign nationals without the need for a Labour Market Impact Assessment (LMIA).
Combined, these two temporary work programs account for more than 600,000 foreign workers expected to relocate to Canada in 2023. When added to the permanent residency stream, (465,000 expected in 2023) more than one million international workers are expected to relocate here this year.
For the Canadian banking industry, lenders must be in position to accurately assess the credit worthiness of a growing immigration market, the primary source for future customer acquisition and growth.
The LMIA process, is the gold standard for credit risk assessment. It assuages whether the employment of a foreign worker would have a positive or neutral effect on the Canadian labour market. Employers typically use the LMIA to show that there’s a need for a foreign worker to fill a job they couldn’t find a Canadian to perform. Work permits under this stream are linked to a specific employer. The validity of these work permits can range from 12 to 36 months, providing flexibility to both employers and foreign workers and security of loan repayment for banks.
The IMP is often, but not always backed by employer sponsorship. Lenders cannot always be reasonably assured of the continuity of the work permit holders’ income stream. This can present an elevated risk of default on loans.
Workers who are eligible for an IMP work permit include those entering Canada as an Intra-Company transferee, those who are international students having graduated from an approved learning institute and are eligible for employment under the Post-Graduation Work Permit Program; workers entering Canada as part of a trade treaty agreement such as the Canada-United States-Mexico Agreement (CUSMA), the Comprehensive Economic Trade Agreement (CETA) and those entering Canada on an open work permit, an increasingly large pool of candidates in Canada, where the work permit is not job specific and therefore, an income stream is far from assured.
Establishing Creditworthiness
In banking, risk management is a central concern. The core tenet of lending is the assurance of repayment. When banks lend to individuals, they need to assess their creditworthiness. In the case of open work permit holders, the typical indicators of stable employment and consistent income might be absent or inconsistent, making it harder to establish their creditworthiness.
Open work permit holders are particularly problematic as these workers could potentially change jobs frequently, move between industries, or even experience periods of unemployment, all of which can disrupt their income stream.
Similarly, students with open work permits might not yet have a stable income. Students with open work permits also have the added challenge of balancing work with their studies, potentially impacting their earning capability.
The temporary nature of their stay and the potential for sudden changes in their circumstances (such as needing to return home) can increase the risk to lenders. This variability and unpredictability in income can heighten the risk for banks in terms of the potential for loan defaults.
Despite these potential risks, they do not make open work permit holders and students ineligible for loans. However, it means that banks must employ stricter measures while considering their applications. They might demand a higher down payment, require a Canadian co-signer or collateral and/or charge a higher interest rate to compensate for the higher risk, or as additional safety measures for repayment.
Therefore, it is essential for open work permit holders and students to initiate and maintain a strong credit history in Canada, showcase savings, and provide evidence of a stable income, if possible, to bolster their loan application.
Permanent Residents with Employment and Work Permit Holders Provide Lowest Risk
Canada’s growing immigration market highlighted by permanent residents, international workers who are admitted under the IMP, and the employer-sponsored LMIA-backed work permits, and international students, provides an attractive avenue for Canadian banks to acquire new customers.
Permanent residents with stable employment and LMIA backed work permit holders provide the lowest risk to lenders offering credit. These individuals have secured employment with a Canadian company that has vouched for their necessity in the workforce. With the employer’s commitment to backing the permit holder, banks can have more comfort providing credit, with the expectation there is less likelihood of loan default due to job instability, excluding unfavorable macroeconomic shifts in the labor market.
The Canadian immigration market can be seen as an opportunity for Canadian banks to innovate their services and develop new risk assessment models highlighted by a comprehensive ranking system of visa holders. By investing in technologies that provide more accurate predictions of loan default risks of newcomers to Canada, banks can better manage their portfolios and extend their services to a substantive and growing annual client base.
It’s a delicate balancing act, but one that allows for an inclusive financial ecosystem that serves not only permanent residents and citizens but also the valuable international workforce that contributes to Canada’s expanding dynamic economy.
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