The ongoing second wave of the COVID-19 pandemic has unleashed a public health crisis that has not been witnessed in recent times in India. People across the country are slowly beginning to brace themselves for the resulting economic crisis that is expected to be followed by the disruption to the global and local economy. Consecutive lockdowns being announced across many states to contain the spread of the deadly virus and a slowdown in economic activities have impacted consumers with layoffs, loss of pay, and a reduction in savings. Even if the economy starts to reopen slowly, consumers may be struggling to regain control of their finances and discretionary spending may come down significantly.
So, what does the future of lending look like? Will the demand for consumer loans come down once the pandemic ends? Will the ongoing liquidity crunch increase borrowings in the near future? How will large lenders get impacted with the second wave?
Here, we will talk about all these points and much more from a lender-borrower perspective.
What do analysts predict about the impact of the second wave on large lenders?
HDFC Bank Ltd.’s performance for the quarter-ending March’21 offers confidence to analyst’s expectation of a smooth sail for large lenders post the second wave. This, despite the lender’s loan growth having been impacted and especially noticeable, is the impact on the retail loan segment.
Indian banks faced a tumultuous 2020 and early 2021, as loan growth collapsed and the increase in financial stress could be seen on the balance sheets. Analysts are predicting that large lenders who withstood the first covid wave will be able to tide over the second one, too and there is no significant damage expected.
This can be seen in the bank’s ability to maintain an enviable asset quality without allowing it to deteriorate. The bank’s financials reflected that stressed loans were low and gross bad loans formed only 1.32% of the net. This is not very different from the previous quarter results.
According to analysts, large lenders have a far higher risk to growth as compared to credit costs. Credit costs are expected to be higher for those lenders that are in the mid-tier and smaller segments.
Analysts added that it would be a challenge for mid-sized lenders to return to the fast-paced loan growth trajectory that supported their premium valuations before the covid pandemic. These challenges have only increased in the wake of the second wave.
Why will large lenders remain unexpected by the second wave?
Large lenders have the benefit of the profile of retail borrowers and also a large share of corporate loans. Lenders such as ICICI Bank Ltd, State Bank of India Ltd, HDFC Bank, etc also have a significant proportion of salaried individuals as borrowers.
While some amount of stress is inevitable considering the quantum of job loss or wage cuts, the profile of retail investors has restricted the amount of stress. Lenders such as ICICI Bank and Axis Bank have a significant amount of corporate loans in their portfolios. Since most companies have deleverage majorly before the pandemic, the resultant stress is far lower. This has helped the lenders maintain their asset quality.
What’s in store for the future of lending?
In the future, analysts predict that more and more online lenders will make the most of the significant mobile and internet penetration across India. This will result in the adoption of the latest cutting-edge technology to establish a secure, fast and reliable infrastructure as loan application processes will be largely digitized.
As compared to traditional credit channels, fintech lenders will rely less on credit history information, bank statements, and even physical engagement with customers will be limited. These will likely create an ecosystem that will involve a faster loan disbursal process that is seamless and risk-free. Both the lenders and the borrowers are set to benefit from this.
Retail lending, in the near future, will likely be revolutionized through a digital transformation of main financial processes. The vast majority of people and financial institutions will begin to realize the true potential of switching to online mode and availing services that are entirely digital.
Endnote
Despite the increasing demand for personal loans and credit cards, lenders are increasingly becoming cautious considering the ongoing economic uncertainty. While the large lenders may sail through the second wave, there is expected to be a significant increase in non-performing assets. Banks are therefore tightening the norms sooner rather than later. They are beginning to rely on information such as the borrower’s credit history, repayment behavior, etc before approving fresh loans.
