Wednesday, 23 September 2020

Responsible lenders must respond to COVID-19’s realities

By Mike Singh

What should a responsible lending business look like? Against the backdrop of COVID-19, the answer isn’t so straightforward.

  • Access to responsible credit should be a financial right
  • Financial literacy remains a priority
  • Not every lending business is suited to navigate the economic challenges that COVID-19 presents

The effects of the Covid-19 pandemic have rippled throughout Southeast Asia, causing immediate and deep disruptions to economic growth. There is an urgent need to bring in the right protections so that short-term relief measures do not become an unmanageable and long-term burden for borrowers and lenders.

But in order to figure out the way forward for the lending sector, we first need to understand why responsible lending is even more critical during this crisis.

Access to responsible credit should be a financial right

More than ever, lending businesses need to figure out how to responsibly get credit to those who need it most.

During this period, the most significant effects would be felt by households due to the unprecedented loss of employment. Small to medium enterprises are struggling to retain staff and the services sector - which makes up a notable 43.8% of ASEAN’s workforce or 126.9 million people - has had to manage the sudden impact of physical operations coming to a halt.

Access to affordable and ethically issued credit options can help whole economies weather these obstacles. On the consumer front, credit can help individuals reach long-term goals, invest in education or respond to unexpected emergencies. On a macroeconomic level, The World Bank suggests it can be used to stimulate an economy, encourage businesses to start, expand and manage risks.

Ultimately, it is a core component to improve the region’s financial health.

Assessing credit risk during unprecedented times

The problem lenders now face is how to assess credit risks with little to low visibility on the horizon. No one really knows what the new normal is going to be. The only way through this is to start lending once again and observe how borrowers will behave.

To manage these risks, digital lenders can be more prudent with their underwriting evaluation, as well as take more tangible steps like increasing risk cut-offs and bringing more manual verification into what were previously purely automated processes. It is also vital to take extra precautions in verifying and validating income stability and employment in addition to assessing existing debt.

In this setting, it’s hard to predict what the future will look like so the best approach is to see how borrowers perform and adjust algorithms accordingly. Digital lenders who are committed to their customers and the segment may be taking on additional risk during this period, but there is no perfect time to start.

It is also worth noting that fintechs with access to alternative data have a critical advantage. Today, individuals spend a significant amount of time on their devices and how they use their smartphone can reveal a lot about their repayment ability. For instance, among the users of pera247, a mobile app that offers credit products, who consistently use specific money management apps, their default rate was found to be three times lower than those not using them. Such behaviour patterns cannot be easily falsified as compared with a questionnaire from a traditional lender where details like income declarations or marital status can be embellished.

Digital lenders can use alternative data to evaluate loan viability in greater depth to better manage the delicate balance of risk and return. The data footprint gathered from the time spent on different apps installed on your phone, the ay someone uses a calendar, the device model and software version. These details could paint an interesting picture of the type of borrower.

Any potential losses should be treated as an investment to improve the lending scorecard. Being a first-mover here can be a strong competitive advantage - an earlier start means having early access to insights on this new reality.

Financial literacy remains a priority

In every economic cycle, lenders must recognise that advocating for financial literacy is one of their primary responsibilities to customers.

This goes beyond running someone through a one-time course but it is the whole process of experiencing the product and learning along the way. Much like basketball, where a player only gets better by learning the craft in a live game scenario, financial literacy should be seamlessly integrated into the entire borrowing experience.

Harsh realities for lending businesses

The hard truth is that not every lending business is suited to navigate the economic challenges that COVID-19 presents. It is a possibility that the hardships faced today are part of a new normal that we all have to get used to. And if this is so, lenders have even more incentive to get their business models right.

Lending businesses should see this period as one that will pressure test their ethics and character. Establishing a sustainable credit model now will help to build trust and market confidence in the long run. Without this stability, lenders risk losing credibility and borrowers may lose incentive to pay back on loans.

If there is ever a time to show compassion, this is it. In the Philippines, institutions were mandated to grant a two-month grace period for the repayment of loans. Where possible, lending businesses can consider if there are ways to support their customers beyond these mandates.

At the end of the day, when lending is done right, we help those who not only need it but who are using this line of credit responsibly.

 As the global economic shock continues to impact the world around us, it is more crucial than ever that digital lenders provide formal credit access to those who need it most.

While more can be done to improve best practices in this new industry, there are a few who do it right and are in for the long haul. They aim to bank honest hard-working people and help to provide them with the credit history needed to graduate them to better products that will bring them closer to their financial goals.

In doing so, ultimately, everyone wins. By responding to these realities, responsible digital lending can improve financial inclusion even with COVID-19 in the backdrop. It makes economic sense but most importantly, is an ethical imperative too.

Mike Singh is the chief lending officer at GoBear, a financial services and data platform for insurance, banking and lending products



Keywords: Credit, Lending, Financial Literacy, Data, Risks, Fintech, Sustainable Credit, Covid-19
Institution: GoBear, World Bank, Pera247
Region: Southeast Asia
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