Approval rates expected to decline for all key retail lending product categories

Information and insights provider, TransUnion CIBIL, published a report that sets out a potential outlook for the Indian retail credit market in the wake of the COVID-19 pandemic. The study draws on lessons learnt from the previous financial crisis to help map potential changes across the major retail credit categories.

The study looks at how the lockdowns implemented to curb the spread of the virus, and the virus itself, have had far reaching implications. It acknowledges that consumers’ financial positions have changed dramatically, with many facing pay cuts and lay-offs. It out lines the sharp drop in consumer sentiment and the significant hit to consumption demand and spending. 

The research observes that the economic implications of the current crisis will have a significant bearing on the future trajectory of the retail credit growth and asset quality. 

At the same time, it recognizes that the impact on asset quality of an individual lender’s portfolio will also depend on the risk management practices adopted by that lender, including the use of risk models and data analytics in credit underwriting, portfolio monitoring through behavior scorecards and early warning systems, and implementation of collection prioritization models.

Secured lending products expected to see more pronounced decline in demand

The TransUnion CIBIL research analyzed the relationship between macroeconomic variables and credit data such as originations and inquiries for key retail credit products.By observing the changes following the 2008/2009 global financial crisis, it is possible to predict certain behaviors.

The previous crisis lasted for around six consecutive quarters, and during that time both retail credit inquiry and origination volumes fell by almost 50% YoY.This drop was more acute for products like personal loans and credit cards (~60%). 

However, the report predicts that the fall in demand for these products in the current crisis period will not be as acute as it was during the previous crisis period and will likely be the reverse, with secured lending products seeing the more pronounced decline. 

Abhay Kelkar,vice president of research and consulting for TransUnion CIBIL explains: “Unlike the last recession, we anticipate demand for products that provide much needed liquidity like credit cards and personal loans will remain moderate as consumers look to secure funds to bridge any personal finance gap.Their general availability and market penetration aremuch greater than they were previously. 

The prevalence of FinTechs has also introduced new, more flexible product structures and greater access via digital channels. Equally, because of the nature of the COVID-19 crisis, there has been an increase in the need for digital payments that credit cards facilitate well. We know that consumers are reducing discretionary spending and will have reduced affordability, as well as a diminished ability and need to travel. And we expect that demand for secured lending products like auto loans and home loans will likely remain weak for some time.”

Approval rates expected to decline for all key retail lending product categories

Again, using the 2008/2009 financial crisis as a benchmark, it is possible to predict a fall in the approval rates for all retail lending product categories. TransUnion CIBIL observed that the likelihood of approval rates dropping is highly correlated with the inherent risk associated with the product itself. The drop in approval rates during this time was most acute for personal loans (-30%) and loans against property (LAP)(-28%).

 LAP are typically seen as higher risk because they are popular amongst smaller business owners, and the irregular cashflow concerns presented by COVID-19 will be a significant issue. Personal loans, which are unsecured in nature and had seen increased acquisition from high risk consumers prior to COVID, also represent an increased risk of default.

Credit cards are relatively less risky because they carry a revolving credit line,which can be periodically managed by lenders, with spending and any changes in balance and behavior monitored closely. Lenders often favor home loans during periods of crisis as they are secured in nature and have a lower default probability.

Kelkar continues: “While we expect a drop in approval rates for all major retail products due to lenders likely tightening their credit policy and customer selection norms, given the inherent risk of products like LAP and personal loans, we anticipate a greater decline in approval rates for these products. Lenders are gearing up to manage and mitigate risk associated with the economic impacts of the pandemic with a cautious approach – leading to potential impacts on balance sheet growth.”

 

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