Riding the Waves of Uncertainty
“The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.”
— Vincent Van Gogh
One thing’s for sure, these days we are living through will go down in the history books as some of the most consequential events in human history. Our worries have ranged from the state of our healthcare systems to our financial systems, and the impact on the least privileged among us. Our troubles with wok-from-home pale in comparison. Instead, Setu is laser-focused on building bridges for the community.
Initial weekly jobless claims data from the United States recently crossed 6 million claims that is about 10 times higher than claims filed during the 2008 crisis. Economists predict that this number may rise even further in the coming month given that the US has only recently enforced substantive lockdowns and the figure might hide individuals who aren’t actively seeking employment due to health concerns.
In India, we are in our 3rd week of National Lockdown and slowly concerns have risen on how to maintain a delicate balance between economic and health concerns, where we don’t want 300 million people that depend on a daily wage to make ends meet further slip into penury. The forecast of devastating ripple effects throughout our economy has prompted the RBI to take measures which include immediate moratoriums on term loans for 3 months and detailed economic relief packages for small businesses expected to be on the way.
“COVID-19 is upon us; but this too shall pass. We need to remain careful and take all precautionary measures. I leave you with this comforting thought. Stay clean. Stay safe. Go digital.” — Shaktikanta Das, the RBI Governor, forewarned.
Though forewarned is to be forearmed, the pace of reversal seen in the Indian financial services ecosystem has also shone light on growth at all cost practices, as highlighted by Gautam Chhugani, analyst with Bernstein, during his comment on HDFC Bank— “In the current pandemic driven environment, we believe HDFC Bank carries certain idiosyncratic risks and unique management challenges,” adding that the bank’s portfolio is “most exposed to unsecured consumer credit risk versus peer private banks.”
While all of us in the industry are trying to re-orient internally to the new normal that has been forced on us, we are simultaneously also trying to chart how the landscape might change both in the short and medium term. During the course of our conversations with multiple different stakeholders in the ecosystem these past few weeks we have repeatedly overheard a few key themes which we thought pertinent to share with the wider community:
1. Collections will soon become the focus area for all Banks and NBFCs. They will need all the help they can get to ensure seamless, low-touch and digital modes enabled quickly. Banks would also in the longer term think more deeply about moving faster into the digital world for their core sales processes due to ongoing restrictions on social interactions.
2. Our local economy is contracting for the first time in a long time, while the financial services industry was built to provide cushion, we need to be on the lookout for consumption shocks that may lead to crippling liquidity crises.
3. The consumer spending boom that was driven primarily by unsecured credit in the past couple of years was the longest boom seen in emerging markets. This cycle will now be flipped, leading to a repricing of risk for even top tier corporate employees, with an overall existential threat to the entire unsecured cash-flow based lending market.
4. Growth might be pushed to the back burner for the next 12 months, with all assumptions on the credit worthiness of borrowers and resilience of companies needing to be retested. Growth might also be tested due to prolonged periods of restrictions in movements across and within countries that extend the overall economic shock.
5. From a fintech lender perspective, the narrative might change from going after higher-risk segments that larger financial institutions (NBFCs, Banks) ignored, to competing for the same solid customers with better value propositions on customer experience and speed of disbursals. Fintechs would need to map risk across all sub-segments and work only on long term sustainable sub-segments.
6. Investment products might see initial lower demand due to extreme volatilities of the stock market, but this might be rapidly reversed as people seek out products with higher yields due to near zero rates in traditional savings instruments such as fixed deposits.
7. A more accommodating and friendly regulatory environment, with an impetus on building innovative solutions to bolster confidence into the animal spirits of our economic markets.
While we don’t profess to have a crystal ball to predict all future scenarios, we are committed to helping our partners ride out these waves of uncertainty and be the bridge that delivers the country to a better future.
We have ruthlessly prioritised collections as the most critical building block. We’re working with multiple financial institutions on various pilots. Write to us, if you’d like to be a part of them.
This article was co-authored by Sahil Kini.
As part of our ongoing efforts at giving back to the community, through D91 Labs, an open-source initiative towards understanding financial lives in Bharat, we have recently launched the Personal Finance Survey, a first of its kind nationwide anonymised survey to understand the financial choices made by Bharat.
Please help us to fill out the survey, spread the word and don’t hesitate to let us know if you would like a peek at the results!
