Although past crises have come and gone without having a lasting impact on the lending industry, this time, it’s different. The pandemic has significantly impacted the way borrowers want to access money and their ability to make repayments. It’s also forced lenders and regulators to look more closely at current lending practices.
Although the new normal is still a picture that’s yet to be fully formed, these are the ways that the pandemic has already changed the lending industry.
1. A digital-first model
To cope with the ban on in-person meetings, the lending industry has switched to a digital-first model to continue to do business. That has allowed borrowers to access the financial products they need and lenders to grant loans. While this method of lending has surged over the pandemic, there are still some challenges to be overcome before it becomes the lending method of choice in the new normal.
For example, many borrowers, particularly in developing countries, do not have access to the internet and are not users of digital financial services. That presents a huge challenge, particularly when the sector is so susceptible to online fraud. Online communications continue to present a security risk and many lenders have concerns that text messages would not always be useful or consistently understood by their users.
2. Greater flexibility
The pandemic has created significant liquidity challenges both for lenders, who have been faced with their own funding pressures, and borrowers, who in many cases have struggled to maintain their loan repayments. The solution for borrowers has been payment holidays, deferrals and more flexible payment terms imposed by regulators. This was necessary for borrowers who may have been significantly harmed if they had been forced to meet the repayments that they had originally agreed to.
Although lenders cannot survive indefinitely without loan repayments, the liquidity of most has remained strong. That has made the regulators consider how more flexibility can be built into loan agreements in the future, with payment holidays and deferrals potentially becoming something we see much more of in the new normal.
3. Changes to personal loan terms
During the pandemic, we have also seen that lenders have been increasingly willing to change the terms of their loans mid-agreement for the benefit of the borrower. As an example, some lenders have been pushing back the term of a loan to account for payment holidays and deferrals, while short-term lenders, like Wonga, have reduced the terms of their loans due to the reduced certainty borrowers have about their future earning prospects.
Whatever approach the lenders take, communication remains the key. With active communication between borrowers and lenders, it is possible to find a flexible, pragmatic and sensible solution that benefits both parties. However, once the economy starts to emerge, we do expect to see lenders look more carefully at the long-term viability of loans and we could see a formal resetting of payment terms.