Dealing with the covid-19 crisis and its aftermath will remain at centre stage for the next several months or years. Almost all high-employment sectors have been severely impacted. Cost rationalization, layoffs and salary cuts are inevitable as industries struggle to cope with unprecedented challenges. To address the crisis, central banks and other authorities have rolled out diverse measures, including liquidity injections, targeted loans to affected industries and regions and policy rate cuts. Banks are also providing forbearance to otherwise economically viable households and businesses.
The Indian financial sector could witness an increase in the NPA (non-performing assets) ratio by at least 2% and a credit cost increase of nearly 150 basis points, according to a recent report published by S&P Global Ratings.
In December 2019, according to an ICICI Bank-CRISIL report, the retail loan book of financiers in India was expected to double to ₹96 trillion by March 2024. The five pillars that were expected to support expansion of the market were greater information availability, higher competition thereby lowering costs for customers, regulatory and government initiatives, a significantly increased penetration in digital lending and reduction in operating costs due to greater usage of technology and data analytics. While recent unforeseen developments related to the pandemic may cast a cloud over the forecast, clearly, the five factors continue to be deeply relevant and more so in today’s environment and will, therefore, continue to shape the consumer lending programmes of all financiers in the years to come. In the near term, financiers are likely to be more focused on introspection of their business models and on collections. It is, therefore, logical to expect a “flight to safety”—the liquidity infused by the regulatory and supervisory authorities are most likely to be deployed towards refinancing and balance transfers of existing loans.
We are also likely to see a much lower appetite for unsecured lending. The cost of delivering credit continues to be a significant item of operating cost and in a credit challenged environment, the risk-reward pay-off for unsecured lending may no longer meet return expectations. Financiers are likely to focus more on opportunities where credit can be digitally delivered and collected. The latter, sometimes, is easier said than done. Therefore, the ticket size of such lending could become smaller and priced more richly to compensate for the costs of collections.
Similarly, we expect financiers to focus more on secured lending but at significantly revised market valuations. Commercial real estate will, almost certainly see a big downward correction whereas at the retail end, a further drop in prices could potentially lead to much-needed demand revival.
Tighter lending criteria as well as lower activity levels will lead to shrinkage in credit demand. Borrowers are likely to tone down their requirements and focus on cost rationalization and other measures to overcome their immediate challenges. Borrowers will need to curtail their leverage and be willing to offer more collateral when underwriting standards are tightened.
Data analytics has been playing a pivotal role in consumer lending over the last few years and the current environment is going to force financiers to invest more time and resources in using data to profile customers. The pandemic has posed significant credit challenges and the ability and behaviour of consumers in coping with these challenges will provide a deep mine of information for data scientists to work on alternate underwriting criteria. Conventional financial underwriting criteria can be significantly augmented with surrogate data to revise the underwriting framework, particularly in the case of small-ticket loans. While working within the framework of privacy laws, banks can speed up and improve their underwriting process by mining of data through tracing of digital footprints, mobile data scraping, geo-tagging and profiling. While these have been used to corroborate and supplement borrower information, increased digital penetration will ultimately lead to higher pre-approved offers by lenders.
Over the long term, the government’s focus on development of health-related infrastructure can give rise to newer lending opportunities and faster delivery of credit both at institutional and individual levels.
As discretionary and high-end consumption spending slows down and interest rates head south, disposable incomes may actually rise. Governments may print currency as part of its fiscal strategy to combat the crisis. This, coupled with debt aversion by borrowers, may throw open opportunities for investment. Gold may emerge as a good opportunity to invest. Banks and other financiers may do well to watch this space, which has hitherto been restricted to a few entities.
Venkataraman Bharatwaj is chief risk officer at Clix Capital