Lending scenario during the global turmoil
The global economy is in the midst of a slowdown, accompanied by a sharp rise 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 cause to emerging markets and developing economies (EMDE).
The damage has already started to affect developing countries like India. Here are some official statistics:
- According to the RBI’s Financial Stability Report (FSR), the Gross Non-Performing Assets (GNPA) ratio for Scheduled Commercial Banks (SCBs) is expected to decline from 6.9% in September 2021 to 9.5% in September 2021. September 2022.
- The Russian-Ukrainian war fueled inflation due to its impact on the global supply chain and also raised gas prices.
- To control inflation, central banks have started raising interest rates, so the negative effect of rising interest rates is that borrowers are reluctant to borrow more money.
- US FIIs have started pulling out of developing markets like India, causing the USD to rise against the INR. This increased the cost of imports.
Given the above economic conditions, financial institutions need to be more cautious and constantly monitor Central Bank regulations. Here are some loan rules that should be watched closely.
- Single borrower loans are limited to 15 percent of the bank’s equity (Tier 1 and Tier 2 capital), which can be extended to 20 percent in the case of infrastructure projects.
- Banks in India must keep a minimum of 4% of their net demand and time obligations (NDTL) in the form of cash with the RBI.
- The Credit Reserve Ratio (CRR) must be maintained fortnightly, while the daily maintenance must be at least 95% of the required reserves. In case of failure of daily maintenance, the penalty is 3% above the bank rate applied on the number of days of default, and at least 50+ critical settlements.
With rising inflation, NPAs and stringent regulatory compliances, it’s a double whammy for credit institutions, and they should be eager to improve the economic situation.
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There are also different ways to create a positive impact in such difficult situations.
A. Explore new opportunities and new markets
According to the Transunion report, India has the maximum number of unserved customers which is 571 million (63% of the total eligible market). 31% of them are millennials (age group 26 to 41) who have significant earning capacity as well as repayment capacity.
Digital lending is an emerging industry in India. KPMG forecasts 48% growth by 2023, with a valuation of $350 billion compared to its valuation of $110 billion in 2019. So the opportunity is huge, but targeting the right set of clients is key. .
B. Improve operational efficiency
Operational efficiency is one of the important aspects of lending business as it directly affects customer satisfaction and direct business results. Low conversion rates will increase customer acquisition costs and loss of business due to the transfer of dissatisfied customers to other lending institutions. Tracking conversion rates, consumer behavior and periodically assessing Net Promoter Score (NPS) will help improve operational efficiency.
Credit institutions should continue to update their policies as Central Bank regulations change. These regulations can be a bane for lending institutions as they can impact their cash flow, lending capacity, overall revenue generation and profitability. Continuous monitoring of regulatory indicators can save you from financial sanctions and restrictions from the authorities.
D. Credit risks
India has one of the highest NPA ratios among developing countries with 6.2% for NBFCs and 5.9% for banks (according to RBI). Ever-changing economic scenarios can impact borrowers’ ability to repay. On paper, they may have enough collateral and financial credibility to repay the loans. However, unforeseen situations can lead to loan defaults. Therefore, the lending institution should be extra careful when servicing loans and closely observe payment habits.
Obtaining early warning signals from NPAs and credit risks is very important to manage credit risks effectively.
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Now you must be wondering how to tackle these monsters easily? The answer lies in your own business data! Harness the full potential of data!
Views by:- Mahesh Baleshetwar, Co-Founder, Intellify Solutions Pvt Ltd.