Is your lending and collections strategy robust enough to adapt to the changes in the macro-environment and other economic uncertainties? Rather than giving in to doom and gloom, it might just be the right time for introspection and the implementation of changes that will serve your business well in the midst of ever-changing market conditions.
With contradictory market sentiments perpetuated by conflicting media and analysts’ reports, it’s not easy to pinpoint the exact state of the current lending marketplace. On the one hand, we have banks reporting shock profit warnings and the so-called end of the unsecured lending party. Meanwhile, on the other side we have reports of an increase in first-time home buyers thanks to a better performing economy since the end of the 2008-2009 recession.
It’s true that South African banks have tightened lending and that the tightening in lending rules may undermine consumer spending and recovery in Africa’s biggest economy. The government has therefore urged lenders to improve access to finance for South Africans in a bid to boost growth and curb unemployment.
The best advice I can offer lenders in these contradictory circumstances is:know the industry you are operating in, pinpoint your target marketand their risk exposure, and make an educated decision from there as to your desired quantum of loan extension.
At the risk of sounding like I might be sitting on the fence on this one, I would like to make the following comments: First of all, I think some of the positive hype about the economy is a little far-fetched, but on the other hand I do not believe for a moment that it isonly doom and gloom out there.
Let’s examine the facts for a moment. There has been a noticeable deterioration in the performance of loans in the unsecured lending space. This loan performance deterioration is a clear indication that borrowers in this segment of the market are under a lot of pressure. For lenders, this has not been the only factor affecting performance in this space. Competition has been tough;the established institutions have been boosting lending into the space, while floods of smaller operators have entered. Competition can help consumers by forcing down prices, but it also forces down eligibility hurdles, so weaker borrowers end up on the books.
However, that’s not to say that those organisations that target consumers on the upper end of the market should rest comfortably on their laurels. We operate in a highly unpredictable economy, not to mention the fact that we’re about to enter South Africa’s annual strike season. No one could have predicted the tragedy of Marikana last year, nor the ongoing and devastating impact that this would have on South Africa’s economy, perpetuated by job losses and negative international sentiment.
No matter how high the debt levels grow, lenders are unlikely toswitch off the lending tap. What needs to happen instead is a readjustment of processes.
The unsecured lending market still creates valuable business opportunities and although there will always be naysayers; lenders just need to be realistic. While there are some major concerns surrounding the unsecured lending market and while we are seeing some tough market correction, it’s certainly not the end of the world - just the end of the world as we know it.
I believe that all of our local banks are certainly robust enough to weather the economic storm. Even those that have been hardest hit in recent months will bounce back, supported by solid teams that have developed the correct models to adapt to market changes. In addition, we have a solid regulatory environment, which serves to aid and support the growth of the industry in a responsible way.
With the possibility of more unstable economic conditions on their way, local lenders and credit providers must ensure that they have robust models and processes in place, regardless of who their target market is. They need to develop robust systems and lending models that can adapt to changing macro-conditions. It’s simply time to take stock of the basics, re-evaluate the lending criteria and processes, anddevelop a solid strategy at the development and marketing stages of the lending process.
What we’re really trying to say is that it’s time for introspection and readjustment. Don’t buy into the panic;rather have risk mitigating strategies in place for the known and the unknown. Through careful planning, you can minimise the risks as much as possible, but this is never an exact science. Take all factors into account: the market, the industry, your environment and particularly your target market.