How COVID-19 changed loan management system in India

Loan management covers a very broad range of business management, including credit card companies, personal loans, stock brokerages, investment companies, etc.

The importance of loan management is multi-tier as, during crises like the present, Effective Loan Management can be the source of circulation of money in the economy.

Therefore, it becomes inadvertent to not understand the difference between pre and post covid scenarios as two worlds, and its impact on the finance industry is fathoms deep, in the context of the utility, the recovery, and the macro market scenario.

To understand the scenario efficiently, one can have multiple perspectives, which would provide the deeper knowledge of the transition, and help understand the multiple folds of the same.

The Customer Perspective

There is massive change in the consumer behavior in the pre –pandemic to post –pandemic scenario.

Before COVID-19, there was an approach of stability and openness which can be seen in the rise of consumer durable loans, credit card usage, etc, where the consumer was open to availing loan facilities from banks and open about paying the money back which is completely changed now.

Research on borrowing patterns shows that post COVID, 46 percent of borrowings were done to primarily run the household, 27 percent borrowers borrowed to repay their earlier loans, and 17 percent borrowed as they lost their jobs. Most of the people chose to borrow from relatives.

Although there were relaxations and easements provided by the government to combat this problem like Open market operations, loan moratorium, etc, this only gave the paymaster a breather.

The economy is under constant threat and menace of another blowout is slowly recovering through extensive litigation and other mediums of recovery, acting as a cherry on the cake for the drop in consumer behavior.

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The service provider perspective

The unprecedented situation has extensively affected the service provider, as the market started opening through credit loans, personal loans, Consumer durables, etc and by the beginning of February 2020, the service provider became more of a recovery agent, and less a banker, with the increasing delinquency and fraud cases.

Cautious spending and unemployment have changed the trend of spending and the market. The first 21-day lockdown alone witnessed a 42 percent hike in digital payment, and online lending was observed. This is an indicator of the need to be technologically and digitally efficient in the Post COVID world. But there is a drastic deterioration in the quality of existing portfolios and there will be bad loans.

However, on the brighter side, a study in university college London showed that post-COVID, the micro-lending systems in developing countries will be on the boom as the traditional lending systems will not be able to operate with the same efficiency.

Thus, giving way to the Banking system, but on the flip side, the entire pre-existing risk scorecards have to be reworked, the credit history cannot alone be the assessment for risk, other factors like the industry they work in and the financials of the borrowers have to be taken into account to decrease the delinquency rates.

The service provider in the post covid scenario should make way for co-lending, which is an arrangement in which NBFCs facilitate the loan origination and collection process while the partnering bank houses majority of loans. This is aimed to resolve fund-based growth problems of NBFCs.

The macro market perspective

The market is the stage where both the players, the service provider and the customer play their roles, making the perspective of the market multifaceted. There is a downfall in the financial sector of the country, but the pandemic has helped the sector test its waters, in almost all the domains.

For the overall development of the country, digitalisation has been a hard step for the economy because of a lack of education and other socio-economic factors. Research indicated that during the pandemic online and digital mediums have boomed.

More fintech and credit companies will make use of government interventions for the digitalization of consumer credit by enabling hassle-free and instant loan disbursals by leveraging technology like artificial intelligence and Machine Learning.

Since the market behavior has changed with a decrease in luxury-based consumption and an increase in need-based borrowing like medical emergencies, education loans, rather than indulgence-based borrowings.

Conclusion

To sum up, digital and technological advancement is the way to go for loan disbursals and management in the Post Covid World.

Along with better ‘Know Your Customer Policies’, to ensure less delinquency and understanding that easy and efficient loan disbursals are the most efficient and easy way to circulate the money back into the economy, indirectly helping the economy recover from the loss.