How to Brace for the Coronavirus Lending Tsunami
No one could have predicted the impact the COVID-19 pandemic would have had on society, personally and professionally. Of the many industries to be affected, banks now need to prepare for a mountain of lending issues that will arise. Here’s a breakdown of what you need to know about COVID-19 in relation to the financial industry.
Financial institutions are not well capitalized with enough reserves for the loans on their balance sheet in anticipation of potential loan default of this magnitude. Individuals are losing jobs and income, leaving no money to repay loans. In turn, the banks will be forced to write down these loans as “bad debt” on their balance sheet or “call” the loan by having the individual pay back the loan in full or the asset that backs the loan will be repossessed. Lending restrictions will be forced to increase for individuals trying to qualify for loans in the future.
The pandemic isn’t just affecting individuals financially, but also respective industries that rely on banks for funding. Travel, energy, tourism, restaurants, and retailers are either being forced to temporarily close or scale back operations while still being expected to pay employees who aren’t on unemployment, in addition to rent or mortgage. Similar to 2008, a hard drop in the market, combined with skyrocketing unemployment rates, could put even the largest banks at risk of failure.
No matter the industry you’re in, you have ties and financial commitments to follow through on. Since the situation is constantly evolving, assess your credit quality early and often through a detailed review of your portfolio. Along the same lines, your valuation process may become an increased risk, warranting a change in the way you evaluate your scope of work. As a result, consider early warning disclosures for financial reporting in an effort toward more transparency.
With no talk of the U.S. government bailing out financial institutions during the crisis to date, banks in good financial standing can generate goodwill with businesses that need assistance due as a result of disruptions. This creates new opportunities for banks to establish relationships with businesses in need of financial assistance that will extend beyond the COVID-19 turmoil. Banks could begin to offer emergency loans to cover financial gaps, as well as waive overdrafts to at-risk customers.
With all this comes a greater investment in platforms supporting financial inclusion. Increased collaboration and investment by financial technology firms by traditional banks leads to a rise in the importance of advanced data and analytic startups. Firms that regulate technology are relying on improved automation of compliance to keep up with the demand. “Given the universe of financial platforms currently in the marketplace, lending has to evolve and connect with customers to provide actionable solutions to optimizing a customer’s credit profile,” Affordit CEO and Founder Kevin O’Brien said.