During this pandemic, most people have seen their cash flow and monthly income deteriorate.
MSMEs who were not in essential services and had to shut down their business for an extended period; people working in the most affected sectors such as hospitality, aviation, logistics, etc. suffered wage cuts and job losses.
This has resulted in a significant reduction in discretionary spending on lifestyle, entertainment, travel and “impulse” shopping. Most households have postponed major expenses like purchasing durable goods and home renovations. Card spending and new loan disbursements fell to 30% of pre-Covid levels in April-May 2020, with 40% of customers requesting a moratorium on their credit facilities afterwards.
Back to normal
As the spread of the virus continues, communities and workplaces are trying to get back to normal life and routines. This is made necessary because of the negative impact the continued foreclosure has had on the economy.
We are also seeing card spending return to 75% of pre-Covid levels, so discretionary spending has restarted albeit at a lower level and therefore the need for credit (cards and loans) has rebounded.
According to our estimates, credit demand has recovered to 50-60% of pre-Covid levels overall; Some of the key emerging trends in credit underwriting are:
Best profile: The average profile of the credit applicant has improved in terms of income and creditworthiness. This could be attributed to wage cuts and job losses, even for some middle-income executives, who before the current crisis had never felt the need to take out a personal loan. Another factor is that lenders have also become risk averse and only lend to the “creamy layer” during the pandemic.
Lower interest rates: The demand for personal loans is being boosted by falling interest rates. The interest rate on personal loans, offered by banks and NBFCs, has fallen from 100 bps to 300 bps. This is mainly due to the massive rate cut by the RBI and the excess liquidity in the system.
Debt Consolidation: The need for higher cost credit card debt consolidation is obvious. Many people had started saving money during the pandemic, which led to an increase in the amount of cards outstanding.
Return to small towns: Home improvement as an end use for people who have returned to their hometowns, to save on the higher cost of living on the subways, and the fact that there is work from home available for most of them.
Lower quantum and tenor: There is a downward trend in the amount and duration of loans sought by salaried people. This could be because the requirements are limited to specific end uses and people are trying to be judicious about the use of debt.
We can also see an evolution, within credit institutions, in terms of products offered and subscription:
(a) Digitization of processes, with an emphasis on “contactless” in terms of the customer journey.
(b) The role of trade repositories like EPFO and micro-service providers like Perfios, Cred, Karza etc. has become more critical.
(c) As per demand, debt consolidation mantra, given the lower rate, is the focus of most lenders.
(d) Trust but verify seems to be the philosophy. A significant weight is given to current income and employment in addition to past performance of credit products.
(e) Less reliance on bureau scores, unless bureaus evolve to give more information to lenders, on recent tensions, moratorium, revenue continuity, etc.
(f) Wage cuts or overall reduction in additional income is a common reality, with some estimates indicating that 50 percent of the workforce in India would be affected. This resulted in an extremely vigilant underwriting process, involving a debt burden assessment with reduced income. Temporary build-up in credit card debt appears to be a common symptom, and very strong past performance allows underwriters to take a call, on a selective basis.
(g) The use of the moratorium is seen as a clear sign of stress, it is usually associated with loss of income either through pay / job cuts. Lenders take into account the higher interest charge that these customers must bear and avoid sanctioning new loans to those who have continued to be under moratorium throughout.
In these unprecedented times, it is extremely prudent for individuals to ensure that debt is used with a specific end use in mind, with a measured approach to the size of the loan ticket. At the same time, loans in the post-Covid world must be granted with the utmost vigilance and verification. The key is to build on the applicant’s current financial situation, in addition to past performance.
The author is Business Manager – Personal Loans, Clix Capital