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Overview:

The last quarter saw the GDP shrinking, and with the lockdown forcing most consumers to postpone discretionary spending, lending activity fell sharply by more than 70%, hitting the bottom at the end of April and spreading over May. There has been some bounce back in June as hope for a ‘new normal’ to find its way, with people resuming their work.

As the “unlocking” gradually takes place – the economy is expected to revive, with a spurt in credit demand- especially unsecured personal loans from MSMEs and individuals, as the majority of them, have depleted their savings/retained earnings. We expect a good bounce-back taking place in the Q3 2020 for pure-play digital investors and spread over another in Q4 2020 for others with a full V-shaped recovery. Extension in the moratorium and further lockdowns will create some complications and this could have an impact on certain companies. At LenDenClub, there has been a significant change in the behaviour of loan purposes. In Q1 2020, it has been observed that there has been a jump of 15% for emergency purpose loans from 63% to 78%.

How adversely is liquidity being affected by Covid-19?

Liquidity may not be a challenge consequent to rate cuts and other fiscal measures initiated by RBI. The year-on-year growth rate for money supply was close to 12.5% in Q4 2019 while it steeps down to approximately 10% in Q1 2020 and would continue to be the same until Q3 2020, expected to bounce back by 2% in Q4 2020.

At LenDenClub this year, there was an increase by 6.2% in withdrawals for May as compared to April, while a decline was observed in the following months, -6.6% for June and -27.9% for July. In terms of fresh funds added, there was a MoM growth of 35.4% for May, 21.6% for June, and 7.5% for July respectively. 

What may be the likely impact on stress levels for major products?

With a dire need to bridge personal finance gaps, personal loans are expected to get a 15.1% year-on-year boost, owing to heightened unemployment rates and salary-cuts. Credit cards too, are on the positive side of the axis, with a 9.6% rise in demand, mainly due to an increase in digital payments and fewer cash payments to curb the spread of the virus and adhere to norms of social distancing.

However, secured lending products are expected to see a more pronounced fall in demand. The decline in discretionary purchasing and reduced affordability will impact demand for asset finance products, reducing the demand for secured home loans by 11% and that of auto loans by 1.7%. Given the inherent risk of products like LAP and personal loans, we anticipate a greater decline in approval rates for these products.

Risk and Default matrix of Q3

While home-loans generally have the highest payment priority, delinquency rate (extent of non-payment or defaults happening in a loan portfolio) in the very high-risk segment has slightly moved up for home loans and LAP in the last one year. Revival in demand is expected to be seen in September, with conditions getting back to track between October to December, as it was before the advent of the global pandemic, provided the economy doesn’t face another downturn, with the V-shaped curve turning into a W-shaped curve. 

A greater decline in approval rates is expected for secured as well as unsecured products, to ensure the safety of investors’ interests. Consequently, investors are more conscious of risky loans, actively monitoring their portfolio and implementing analytics-driven risk and collection management practices to minimize the impact of any potential risk, in these difficult times. 

References: LenDenClub Research; CIBIL Retail Credit Outlook

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