The Covid-19 pandemic continues to affect the lives and livelihoods globally. It has led countries and economies into recession of unknown kinds whose depth is still difficult to be evaluated. The damage to businesses, economies and individuals is becoming visible yet its depth is still not known. The challenges pertaining to consumer repayments and credit stress have also increased. However, since the depth of destruction is still not known, it is difficult for borrowers and lenders both to measure their vulnerabilities. In such times, what can be the measures taken by the financial systems to protect their books and at the same time be fair to their borrowers?
Due to depleted savings, falling incomes and declining asset prices, most borrowers are seeking relief in some form from their existing debts while others are seeking fresh credits only to manage these day to day operational and working capital challenges. The lenders in line with policy and guidelines provided by regulators tried to provide temporary relief to the borrowers through temporary moratoriums or rate reduction or protection from non-performing classifications etc. The economic stimulus for fresh credit has been overshadowed by issues concerning existing loans and debt servicing
State of Borrowers
Initially, with lockdowns restrictions and tepid movement of economic activities, most economies began dipping into recession with GDP remaining on average 4 percent below trend due to lower productivity, reduced capital stock, and high unemployment. Many small businesses, individuals, and consumers lost their incomes, salaries and fund flows. This stressed their financial positions leading them to dig into their savings and reserves. However, in most of the cases that was not enough to manage regular debt servicing leading them to avail moratorium as per the regulatory allowances. To put this impact into perspective, as per a survey conducted by PaisaBazaar.com on emerging trends that may shape the way for consumers and the lending industry across 8000 participants, it found that almost 65% participants said that the pandemic has had a negative impact on their incomes. Only 40% of those who availed the moratorium can afford their EMIs and 55% of the respondents said they would approach their lender to restructure their loan in some form to provide relief. In Indonesia, restructured loans grew to about 18.6% of total loans in August 2020, and could continue inching up. (S&P Global)
The other issue which most of the borrowers is the lack of funding resources to make a restart. Due to reduction in cashflows as well as depleted income, the credit worthiness of most of the borrowers has depleted. Further, the lack of capital and drying up of income resources for financial institutions have also made them vulnerable to liquidity challenges. This scenario is a double blow of what is needed to help jump-start economic recovery through fresh credit infusions. There are reports of loans becoming less available in Philippines (Dickler 2020; Rivas 2020). Thus as demand begins to grow the various tight credit standards, reluctance of lenders is most likely to affect lower income and retail borrowers the most. Under such situations, borrowers resort to informal sources of borrowing which can be way too risky and damaging for them in medium to long terms.
State of Lenders
Simultaneously, lenders too face a dire situation. They are unable to operate their branches at a full capacity, their regular incomes, collections and liquidity has dried up because of the loan moratorium availed by the borrowers. Though the financial stress in terms of Portfolio at risk and delinquencies has not increased tremendously due to provisioning relief measures provided by the regulators, however, the stress in the portfolio is quite evident. For eg, In Vietnam, the regulator has directed banks to extend debt relief to affected borrowers, and eased requirements on loan classification and provisioning. Banks can reschedule the principal/interest payments for the affected borrowers for up to a year. One such restructuring is allowed without changing the loan classification. Rated banks had rescheduled 1.5%-4% of their loans by the middle of 2020. Thus while banks have stepped up provisions in 2020, a sizable chunk is getting pushed to next year due to forbearance. (S&P Global)
These are difficult times, requiring Asian countries to navigate multiple challenges. The COVID-19 pandemic comes in the context of longer-running challenges in the region: slowing productivity growth, high indebtedness (India, Indonesia), population aging, and rising inequality (Indonesia, India, Phillipines). The resurgence of the crisis especially in India, lockdown imposed restrictions, loss of lives has made the position of these countries highly vulnerable. The already stressed NPA position of the banks can push the country on the verge of a debt crisis in case any measures pertaining to relief and moratorium are withdrawn. Further, in Indonesia which is still too dependent on its informal sector for funding, support of regulators and government is likely to reach and support the most vulnerable. Under such a harsh scenario the risks pertaining to harsh collections practices, unexpected fees, interest rate revisions, lack of transparency, and predatory lending, etc remain high.
Overcoming these challenges
- Communicate Proactively: While the governments and regulators continue to provide relief measures, moratoriums, relief from credit stress reporting, many borrowers especially consumer borrowers, MSMEs may be unaware of or unable to access relief that is intended for them. Moratoriums, rescheduling, and reporting to credit bureaus are complicated and may be difficult for borrowers to understand. Thus lenders, collectors, governments have a duty in this extraordinary situation to ensure that the population is well informed. Borrowers must be clearly informed about the possibility of obtaining moratoria or other restructuring, fair moratorium terms, and what to expect when payments resume. Policy makers, regulators, and FSPs need to hear directly from borrowers to understand their questions and concerns. Even financial institutions which are undergoing so many compliance and reporting changes regularly, should take extraordinary measures to communicate clearly and proactively with staff, customers, and relevant third parties.
- Monitor the market for Complaints: Regulators, investors and credit reporting systems should ensure that credit markets treat borrowers fairly. They should monitor any kind of bad practices, forceful collections etc through complaints data, social media, and direct surveys. Analysis of complaints data gives a deep insight on the emerging risks, and Policy makers should take a note of the same. They need to reach out to borrowers through consumer surveys to identify and assess the main problems they are facing and offer them support and required protection. Any bad practices related to collection, not providing moratorium, additional interest charges can only be stalled if Financial institutions, regulators, investors, and borrowers communicate openly and more frequently.
- Exit measures: It was seen that a lot of countries had allowed loan deferrals as a solution to covid relief measures. Loan deferment is when a lender is allowed to temporarily halt making payments on their principal and interest of a loan for an agreed-upon time. Payment deferrals used were either individual loan restructurings or system-wide approaches for example, payment holidays, lower interest rate, adjusted collateral requirements. However, as these recessionary trends and fears of 2nd wave is still likely to continue, the exit from these relief measures cannot be immediately withdrawn. Terminating these measures too early can adversely impact borrowers facing liquidity problems and lead to lasting damage to the economy and the financial sector. Decisions on timings of moratoria should be based on an assessment of the needs of borrowers; the effectiveness of historical and existing schemes; the scope for more targeted and time-bound programs; and the estimated current and future impact on banks’ capital, earnings, and liquidity—comprehensive stress tests can help.
- Use of Technology: Countries and banks are increasingly recognizing the value of technology to increase the effectiveness and efficiency of debt relief measures. They are analyzing demand shocks and recovery trajectories and translating them to probability-of default They are trying to shift to consumer interaction model using digital transformation by using automated credit underwriting, collections and payment systems. They are using real-time data analytics for better decision making.
It is the duty of financial institutions, regulators and governments to come together and plan a delicate balancing act. While banks cannot relax their underwriting standard and cannot play with public deposits by relentless lending, they also cannot act as Shylocks to recover their monies. In these unpredictable and unprecedented times, Financial institutions, policy makers, and regulators play an important role in ensuring borrowers are treated fairly and responsible. A customer focused approach which is based on real time data, technology and open communication should be utilized to resolve the current crisis at hand.