Despite the pessimistic tone Matthew Lynn is in fact doing us all, Banks and Alt Lenders alike, a favour. In this piece he reminds us that that there has never been a recession yet which has not been accompanied at some point by a financial crash. And of course it is difficult to argue that the COVID recession is any different. You cannot regulate away an economic shock as big as this one and the impact of the sharp fall in economic activity is bound to manifest itself sooner or later. The big banks in the UK seem to be taking this pretty seriously reining in lending policies and being more selective. The Alt lenders however are behaving quite differently. Certainly their algorithm driven lending policies will steer them clear of the most obvious problem sectors but it is difficult to see how they will not undergo a certain amount of financial pain within the immediate future. I was given the unenviable task of managing a whole loan portfolio in decline. Computers are great at increasing efficiency in reaching lending decisions and processing documentation and data, even, perhaps, assisting in getting money back more quickly, but it will not help if there is a systemic collapse. To use the current situation as a means to build loan portfolios to me looks questionable as a strategy.
In January of this year the Federal Reserve published the Small Business Credit survey which looked at the business practises of online small business lenders from all over the United States. This was of course before COVID changed everything. The business showed a small number of common characteristics which include an automated online application process, proprietary algorithms to determine credit worthiness and a focus on speed and inclusivity. Succinctly the conclusion was that borrowers generally liked working with online lenders upfront but not later in the journey. This is obviously tied to the likelihood of approval which, not surprisingly, is the critical factor for a lender but it also points to the fact that credit is easier to obtain for online lenders than from traditional institutions such as banks. Satisfaction levels from borrowers working with digital lenders were significantly lower with the new boys clients citing inflexibility, high interest rates onerous repayments etc. It is much easier to dole out the cash than to get it all back together with interest and on time. Since January the whole situation has become a lot more risky. Next year’s report will be very interesting.
The UK national audit office has warned that up to £ 26 billion in Government bounce back loans are at risk either through fraud or the inability of borrowers to repay. I cannot say that I am surprised by this as it was a hurried scheme and was probably not thought through thoroughly. The loans are made either through existing banks both traditional and digital and are guaranteed by the government. The institutions that rushed in to capitalise on the government guarantee had better start looking very closely at their documentation and compliance with stipulated process. Looks like a lot of organisations might find out the hard way that a guarantee is not cash.
Howard Tolman is a well-known banker, technologist and entrepreneur in London,
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