Special Feature
An allied recovery What now for unsecured lending? Shyam Raval Broker Manager Esme Loans
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OVID-19 and the associated lockdown has impacted us all, radically altering the business landscape. Firms have had to juggle mothballing premises, home working and caring for dependants with pivoting to survive and remain productive when demand for most products and services dropped off a cliff overnight. The true scale of the shock continues to be played out. GDP has fallen 20% in Q2, 730,000 fewer people are on payrolls since the lockdown began and regional restrictions are impacting consumer and business confidence making it complicated to forecast the recovery. Initially, lenders were inundated with forbearance requests on existing debt. Esme provided all customers in need with the option of a repayment holiday, successfully standing up the process and platform capability within days of lockdown’s announcement. Working closely with our parent NatWest, we also deployed teams to enable lending under the government schemes totalling over £11 billion. Naturally, features of BBLS and CBILS saw demand outside these schemes subdue. We saw increases in early repayments as borrowers refinance existing (typically more expensive) debt to benefit from 12-month repayment holidays, subsidised interest rates and removal of personal guarantees. By leveraging our technology, Esme can enable delivery of a dynamic risk appetite that rapidly adapts to market opportunities and shocks. As such, despite decreased demand, we continued to lend under a revised credit appetite throughout the crisis. We’re now starting to see pockets of demand forming across several sectors and are developing this capability further to best respond to this need as the economy opens up. 38 | NACFB
What next? Government subsidised lending will eventually cease. It remains to be seen how much liquidity for new money will be available without guarantees at a time where BBLS and CBILS loans could begin to default without further forbearance. For some the unit economics will not work, potentially depressing competition and the variety of finance options available. As the recovery will not be uniform, lenders are unlikely to switch back to the products and appetite parameters offered pre-COVID. Businesses demonstrating that they have traded out, withstanding the shock will be most attractive, whilst credit teams will favour applicants who can afford to service new money in addition to any COVID debt they may have taken. Underwriting models will evolve, using non-traditional data sources alongside credit bureau data. Amongst several experimental projects, Esme are using alternative data sources including localised behavioural, demographic & footfall data to support the analysis of an applicant’s recovery potential. Adoption of open banking and accounts package linked to applications will gather pace. Customers will benefit from faster application processing, removing the need to gather and upload documents, offering one click provision of data in a secure manner. Lender side, digital access enables the ability to accurately and instantly process the financial data to automate affordability assessments, whilst reducing fraud risk and staff costs. The sheer number of businesses that borrowed under the government schemes will likely prompt a revaluation of loan product features. Lenders may launch multiple risk appetites per product with features (such as no PG and varying capital repayment options) dependent on the location, sector and recovery demonstrated by the applicant. Brokers are key allies for lenders re-entering the market. Targeted distribution of regional dynamic appetites will likely drive far higher returns than localised direct marketing that risks quickly becoming outdated. Brokers allow technologically equipped lenders to be nimble and avoid the wholesale sector exclusions of the past. The market may be distorted for some time to come and challenges of a no deal Brexit could complicate things further, but SMEs are resilient and innovative. Esme stands ready to fund the recovery.
