Throughout the pandemic, we have discussed the debt tsunami crashing over most of the world. Unfortunately, 2021 will bring the after-effects, as credit grantors, consumers and governments try to work through a flood of uncollectable debt. Here are some of my grim predictions, with a focus on Europe.
Uncertainty will continue around the economic outlook
While vaccines are being identified, there isn’t a high degree of confidence that they will put the world right — and even if they cure the health problem, they won’t fix the economy. The impacts of the pandemic will be here for a long time, perhaps even permanently. On top of that, in the UK, we have the implications of the Brexit deal or lack of one.
Continued negative confidence will put pressure on interest rates, and the currency exchange
Inflation may rise, and if it does it in the UK it will impact the most distressed household wallets in Europe, with the highest borrowing to income ratios. Households will need to survive on borrowing — combine that with lower incomes and you have a perfect storm.
If that’s the case, I see several things happening:
- Credit grantor failures. Some Tier 2 lenders will go to the wall, as they won’t be able to afford the debt on their balance sheets.
- Low profits and high losses for credit grantors that survive.
- Increased provisions, reduced capital, less ability to lend.
All this will raise the question: Whatever capital I have got, how much can I lend to borrowers who have a low confidence on their own financial prospects, and are unsure if they should borrow or not? How can I get that right? Those credit grantors that know how to truly optimize have the chance to be winners. They can optimize the use of their capital and who they lend to. They have to be absolutely forensic, because they can’t afford to lose a small bit of a small amount of capital available.
Regulators will want more tolerance, but many credit grantors will be unable to afford it
Their balance sheet won’t support it. When you have loans that are not profitable, and the regulator wants you to take the loss, you will push those loans to the debt resolution space. Bounce back loans and CBILS (Coronavirus Business Interruption Loan Scheme) are a good example – they are an issue for banks, and a big political issue. It’s not just regulators who will push for tolerance, the government will as well. The vast majority of these loans are held by sole traders. There’s a whole community of debt now swirling around, and sole traders will have to go to the government for relief to stay in business.
Lower tax payments will bring more cuts
There’s is a double whammy – SMEs that go out of business due to the pandemic also aren’t paying any VAT. So on top of the money lent to them that they can’t pay back, they won’t be paying VAT, which will put stress on the Treasury. Even businesses that stay open will have massive shortfalls, which will reduce taxes paid. This will impact local governments; budgets will be cut and we’ll be back to austerity. We’re seeing the impact on the private sector now, and the public sector has been protected so far. That will start to change when we get to the next budgeting round.
There will be a massive drive toward third-party debt servicing and debt purchase
As in the 2008 crisis, there will be a focus on where to put the toxic debt, such as “bad banks”. The mindset has already shifted from “How do we get back to normal?” to “Some people will need to look after themselves.” In terms of how we view the debt from the pandemic, we will move from an empathic view to a toxic assets view.
The servicing side is really significant. Debt collection agencies will have a massive advantage here. Banks can’t recruit enough people to service this debt, so the DCA market will expand massively.
We could end up facing some quite Orwellian stuff
Some employment sectors will not recover, they will just disappear. This will impact the way people live. Will they still subscribe to so many cable channels? Will they still insure the cat? Some industries that were built on low unemployment and good incomes and high quality of living will have to change. And in the UK, there’s also the impact to institutions from a loss of tourism income, which will affect transport, leisure and hospitality. It may be a long time before people come to the UK, even if it opens up, due to concerns about travelling. Even though the UK has the upside of staycations from residents, it’s a big gap. So many industries depend on that tourism and leisure.
The number of customers deemed vulnerable will go through the roof
Will the government really pursue them for the debts they took on, or their taxes? The banks that issued loans will pursue for them for 12 months, after that I’m not sure. The banks will get it back through government debt bonds, and other initiatives.
These debts will hang around for a long time
Four weeks before the pandemic broke out in Europe, I was speaking to a Southern Europe government, about how they could manage the billions of NPL euros owed from the financial crisis of 2008. The government will look at various ways to work the debt down. In the UK, Finance is looking at bringing their collections capacity up to pace. There are lots of individual and corporate debt aside from CIBL. Many SMEs won’t pay VAT, but the people who used to work for those businesses can’t pay their self-assessment tax.
Where are utilities going to go? They can’t turn customers off, and bills are higher because everyone has been at home. People have been hammered through the summer with higher bills, and bills in winter will be massively increased.
This will even affect telcos. It has been safe for them to offer unlimited calls and traffic, but now people are on their phones much more, and that comes at a cost. All the profitability modelling will have been based on average usage rates. Those have probably shot through the sky, and it’s the same with wi-fi.
We’ll see new types of credit emerge, and new processes
In countries like Australia that had natural disasters, lenders created new processes in collections because they had to. You can’t just write off all the loans. This disaster will also drive new products and services.
There will be opportunities for specific kinds of organizations that can provide goods and services for this environment
These include things like car sharing services. We will see innovation and new services in the credit grantor space, as new players enter without the baggage from the pandemic on their books. We will also see growth of the subprime lending space, served by fintechs.
For all the SMEs that close, new ones will spring up, doing something different. A shop selling fishing tackle may close, and reopen a week later selling PPE or family games. What will be different is how these new SMEs are funded. We may see some sort of credit products like those you see in parts of Africa: short ticket, small amount, daily working capital.
Whilst the challenges will be harsh and numerous, the collections and arrears receivables management Industry has come a long, long way since 2008 or 1991. Even where regulation does not demand the right treatment of financially vulnerable customers, the ethos of such has been increasingly adopted. Creditors know that “you can’t shout money into a wallet”.
I do have concerns that the lessons of the past are not being leveraged by far too many institutions. I fear there will be too much blame on external factors over the limited adoption of the right capabilities to mitigate debt impacts for customers, shareholders, governments and taxpayers. It will be interesting to see how history will describe the next couple of years in financial services: Will it be a collective industry approach to solve a debt crisis? Or a scramble for the little money that’s there?