Lending scenario during Global Turmoil

Mahesh Baleshetwar

The Global Economy is in the middle of a slowdown, accompanied by a steep run-up in global inflation to multi-decade highs. These developments raise concerns about stagflation—the coincidence of low growth and high inflation. This combo could be an early warning of the damage this would bring to Emerging Markets and Developing Economies (EMDEs).

The damage has already started to impact developing countries like India. Here are some official stats:

  • As per the RBI’s Financial Stability Report (FSR), Gross Non-Performing Asset Ratio (GNPA) for Scheduled Commercial Banks (SCB) is likely to increase to 9.5 per cent in September 2022 from 6.9 per cent in September 2021.
  • The Russia-Ukraine war has fueled inflation because of its impact on the Global Supply Chain and has also increased gas prices.
  • To tame inflation, central banks have started increasing the interest rates, thus the adverse effect of rising interest rates is borrowers shying away from borrowing more money.
  • FIIs from the US have started pulling out from developing markets like India thereby USD is rising against INR. This has increased the cost of imports.

With the above economic conditions into consideration, Financial Institutions have to be more careful and constantly watch for Central Bank regulations. Here are some lending regulations which need to be closely monitored.

  • Lending to a single borrower is limited to 15 per cent of the bank’s capital funds (tier 1 and tier 2 capital), which may be extended to 20 per cent in the case of infrastructure projects.
  • Banks in India need to keep a minimum of 4 per cent of their Net Demand and Time Liabilities (NDTL) in the form of cash with the RBI.
  • The Credit Reserve Ratio (CRR) needs to be maintained on a fortnightly basis, while the daily maintenance needs to be at least 95 per cent of the required reserves. In case of default on daily maintenance, the penalty is 3 per cent above the bank rate applied on the number of days of default, and at least 50+ critical regulations.

With the rising inflation, NPA’s, and strict regulatory compliances, it’s a double whammy for lending institutions, and they must be looking forward to easing the economic situation.

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There are different ways to create a positive impact in such challenging situations as well.

A. Exploring new opportunities and markets

According to the Transunion report, India has the maximum number of unserved customers which is 571Mn (63 per cent of the total eligible market). 31 per cent of them are millennial (age group 26 to 41) who have major earning power as well as repaying capacity.

Digital Lending is an emerging sector in India. KPMG forecast 48 per cent growth by 2023, with a valuation of USD 350 billion from its valuation of USD 110 billion in 2019. So, the opportunity is huge, but targeting the right set of customers is the key.

B. Improve operational efficiencies

Operational efficiency is one of the important aspects of the lending business as it directly affects customer satisfaction and direct business output. Low conversion rates will increase customer acquisition costs and loss of business because of unsatisfied customers moving to other lending institutions. Tracking conversion ratios, consumer behavior and periodic evaluation of Net Promoter Score (NPS) will help improve operational efficiencies.

C. Compliances

Lending institutions must keep updating their policies when any regulations from the Central Bank are changed. These regulations can be a bane for lending institutions as they can impact their cash flow, lending capacity, overall revenue generation and profitability. Continuous tracking of regulatory indicators can save you from financial penalties and restrictions from the authorities.

D. Credit risks

India has one of the highest NPA ratios among the developing countries with 6.2 per cent for NBFCs and 5.9 per cent for Banks (as per RBI). Constantly changing economic scenarios can impact borrowers’ repayment capabilities. On paper, they may have enough collateral and financial credibility to repay loans. However, unforeseen situations can lead to defaults on loan repayments. Therefore, the lending institution needs to be extra cautious while servicing the loans and observe payment patterns closely.

Getting early warning signals of NPAs and Credit Risks is very important to manage Credit Risks effectively.

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Now you must be wondering, how can one tackle these monsters with ease? The answer lies in your own business data! Make use of data’s complete potential!

Views by:- Mahesh Balshetwar, Co-founder, Intellify Solutions Pvt Ltd.

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