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The outbreak of the deadly respiratory virus, COVID-19 has been catastrophic for humanity. The pandemic carries with it a potentially equally disruptive economic fallout.
The COVID-19 virus, which till now has spread across six continents and 100+ countries, had been officially declared as a Public Health Global Emergency by the World Health Organization (WHO) in January 2020 and termed as a Pandemic in March. Its global spread has depressed the financial markets with severe implications on trade, supply chains, and economies. It has also led to the subsequent deterioration in cash flows for various sectors, banking, in particular, is one of the most affected sectors.
In order to contain the spread of the COVID-19 virus, several countries have started implementing strict measures and are taking a short-term economic hit. A number of countries have been put under strict lockdown; bringing a halt to the major industrial production units, supply chains, and the economy as a whole.
Coronavirus Global Spread as of April 7th 2020
The governments are enforcing proven public health measures such as social distancing in order to physically disrupt the contagion. Their measures have in turn severed the flow of people as well as goods and stalled economies. The entire financial ecosystem, banks, businesses, industries, etc. are facing the brunt of the pandemic. The COVID-19 outbreak has pushed down economies around the globe in a deep trench. The head of the International Monetary Fund declared that “it is clear that the global economy has now entered a recession that could be as bad or worse than the 2009 downturn”.
As a result of growing distress, markets are already reacting to their real and supposed threats to economic growth. Stock market Indexes are down over 20% in all major countries.
Major Predictions on Coronavirus and its Impact on the Lending Industry
With COVID-19 causing great economic chaos around the world, lenders find themselves with a very crucial role to play.
Both traditional banks and online lenders are responding actively to the quickly changing assessment of the economic impact of the coronavirus. The financial institutions (unlike the 2008-09 recession) are communicating with all relevant stakeholders the complete detail on the measures they are taking to not just keep their staff safe but also how they are responding to requests from borrowers who are experiencing hardships in repaying their loans.
- Investment moving to safe havens- Over the past few weeks, the stock markets have shrunk to dangerously low levels, leaving investors running for safety. The move to obtain stability in investments means investors are moving away from stocks to bonds to treasuries, which previously experienced less volatility in times of economic crisis. This creates a major issue with smaller online lenders being unable to fund new applicants.
- Poorer Credit Quality – Worsened credit quality and limited funding will further pose greater pressure on the liquidity of financial institutions, particularly regional banks. Though banks have a solid capital buffer as compared to the 2009 recession, even they will not be able to swallow the expected wave of bankruptcies/closures of small businesses. This problem will be acute in the retail and hospitality segment, dependent on footfalls for driving revenue.
- Digital Wins- Consumer’s wish for digital banking services is expected to increase in the midst of the COVID-19 outbreak, forcing many traditional financial institutions to stay up to date with digital innovation. As a result, many banks and credit unions may look to fintech firms for assistance in bringing better digital banking solutions to the marketplace.
- Job Loss Impact- One of the major impacts of shutting down of companies or businesses will be seen on the job market. Companies whether big or small may have to ax jobs to remain solvent. This means that lenders to individuals, especially those who were targeting the sub-prime segment will see major defaults in their portfolio.
- Navigating Government Schemes- The $2 trillion stimuli for coronavirus is supposed to help businesses survive the shutdown. Almost $349 billion of it is earmarked for small businesses. But lenders need to make sure they are able to do a fine balancing act in supporting small businesses versus making sure they are legally compliant. Please reach out to our team if you are interested in learning about our Paycheck Protection Program Software for community banks.
- Brand Building- The turmoil will also lead to major churn amongst customers as brands will take this opportunity to capture prospective borrowers online. With everybody stuck at home, brand building online will be a critical way to get your offering in front of your target market.
- Liquidity- The market is extremely volatile. But volatility is kind to the lender holding ample cash versus the one who is dependent on the kindness of external investors. Coronavirus will lead to consolidation amongst smaller players especially in the fintech lending space as many players won’t find investors in the tough market. Traditional banks and credit unions can take this opportunity to drive hard bargains with such players.
Downturns in the businesses and economy are common and are generally caused by unexpected circumstances. On a broader outlook, the COVID-19 crisis will have long-term impacts on the economy and individual financial circumstances. Lenders, instead of panicking, need to invest in digital and make sure their portfolio is robust to withstand the onslaught of defaults. Lenders who can believe and act that the COVID-19 as an economic opportunity instead of a crisis will be the big winners in the coming decade. But make sure you are able to bring all stakeholders on board. You need to be decisive but not overly aggressive in such a situation.
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