Introduction:
Covid-19 the pandemic has affected so many Lives & Livelihoods since its Origin in December 2019, So much so that It Has shrunk the GDP of almost all nations putting the annual growth trajectory into a downward spiral. Covid-19 a viral, airborne & easily transmissible disease first surfacing in China, pushed up fatalities in India during 1st Wave March 2020 & 2nd Wave March 2021.
Govt. prioritized human Lives over Financial Losses introduced “Lockdown” as a measure across India. People who are dependent on daily wages were left stranded especially in the unorganized sector. “Panic buying” resulted in surging of food prices, shortages locally due to huge demand spike demand, this huge pent up demand boosted consumption specially in the FMCG sector. But still there was a huge decline in demand the automobile sector, Tourism Sector, Airline Industry, they were having a horrid time. As the nation unlocked bit by bit with govt. support almost all the industries could see recovery by Q3-2020. But the nature of recovery be it “V” shaped or” I” shaped experts differed.
Covid-19 would usher in an irreversible change in measuring consumption, Revenue, Cost Structure all parameters would be benchmarked w.r.t pre Covid-19 level. Credit, Credit Risk & Credit Risk management were no exception.
Credit:
Post Pandemic Credit was not an issue as Govt. has ensured supply of money by slashing repo rates–and maintained inflation so as to set in motion the wheel of market investment, investment in reality sectors, discounted automobile Loans for the 2 Wheeler & 4 Wheeler Industry. The irony lies not in supply but in consumer demand, When the future looks uncertain who resorts to new loans–serving the existing loans became troublesome for middle class & financially weaker sections – Lot of business folded, there were huge job losses in the organized & Unorganized sector resulting in a dearth of Liquidity & per capita consumption took a nose dive.
Individuals:
For the fortunate folks who were working from home (WFH) became the new norm enhanced safety added a lot of possibilities, now there was much time & expenses saved from lack of travelling, vacation, marriage parties etc.so the amount saved people invested in term insurances & health insurances. Those who had more Capital invested in Stocks & properties at depressed rates. Investment in properties & other assets took through Online loans, simple KYC Process (Know your customers) & digitalization in banking enabled buyers access credit but there was a lot of pessimism prevalent “what if – there is a default?”, especially as the Credit Risk model has not been developed taking into account such a huge unanticipated Catastrophe Covid-19. It was realized evaluating Risk of an individual in defaulting cannot entirely be on past history, Character, Capacity etc. Evaluated in form of a credit score.
Due weightage must be given to the health status – Ideally Zero Score for discouraging habits e.g. smoking/alcohol/sedentary life style & Extra Brownie Points if the following questions are answered.
- Are the Loans Ensured?
- Is there a term Insurance?
- Is there Health Insurance Cover for Self, Family & Parents?
- Is the individual & immediate family vaccinated?
Now if the answer to the questions are positive then there is reduced probability of capital erosion due to medical treatment the charges of which has inflated due to the imbalance of medical resources demand & supply in the wake of this Pandemic in phases where it got more virulent.
Equity albeit risky is a wealth creator it can give unmatched returns. For The Indian middle class, upper middle class it was a time to invest in stocks, mutual funds, index funds & ETFs but this phase was preceded by investment in Gold, Silver etc. During the First Wave of Covid-There was an interim relief by RBI mandating banks for a 3-month moratorium on term loans but it was optional for the Creditor-Part of it got invested into equity as prudence would suggest for others it created an emergency reserve yet it failed to serve its purpose of boosting consumption as envisaged.
SMEs
Small Enterprises (having annual revenue below 50Cr.) were the hardest hit mostly with reduced demand from the OEM (Original Equipment Manufacturer), with the Cost of Carrying Inventory & its inherent cost they were the most affected as they trade on thin margins. SMEs Working Capital is stretched even 2-3 days of amount receivables postponement affect their operations. The OEMs with higher Cash Reserves came to the rescue of their suppliers & promptly paid up the outstanding dues in some case preponed the payments. Although there is TREDS (Trade Receivable Discounting system) in place but using that in these difficult times would mean discounted return for the OEM & days of waiting for the SME supplier. The Reduced rate of interest for loans was not enough to entice investments from the small suppliers even Capex Investments were deferred. In most of the cases there were job losses – as the reduced demand took a toll & they do not have deep pockets to adjust to the financial shocks. Govt. reduced Corporate taxes & deferred tax liability deposit date multiple times but it hardly brought any relief or boosted the credit outlook –without demand serviceability of existing Loans became Impossible-Opening up the door of Mergers & acquisitions across industries be it vertical or horizontal.
Government
The credit Rating of Nations were also affected Post Covid-19 as with shrinking demand the GDP (Gross Domestic Product) & Widening Fiscal deficit. Gap between Expenditure & Tax Collection with business activity constrained, the GST Collection also plummeted on top of that there was an additional expenditure on Health due to Pandemic under the head of vaccine development, Vaccine procurement, extra hiring of medical, health care workers – Compensation for deaths of Govt. Employees etc., Subsidies for LPG Gas for the BPL Families, Free ration for the both BPL (Below Poverty Line) & APL (Above Poverty Line) Families both Urban & Rural. To add to it Govt. increased the rates & working hours – therefore Increasing allocation for the MNREGA Scheme.
Conclusion
The Credit Risk Post Covid-19 is not to be evaluated in Silos but the credit Sentiment of the ecosystem- the industry, the nation, individuals to be considered coupled with that of market sentiments & projected outlook by the different finance institutions at a given time.
- If there is too much liquidity in Banks & NBFCs –they must give preference to investment in IPOs, Mutual Funds, Commodities, ETF etc. rather than giving credit to individual & companies with higher risks.
- It must resort to secured loans at reduced rate of interest.
- Buying Back shares is also a lucrative Option.
- Health Parameters & Insurance Coverage status need to be checked while undergoing customer risk profiling.
Digital has been the bridge that has sustained necessary activities in Covid Times – The Companies have embraced this accelerated digitization so adoption of AI (Artificial Intelligence), Data Analytics & Block Chain technology will be the key drivers for informed decision making before credit disbursal these are the tools that ought to be employed.
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