Coronavirus impact | Significant drop in approval rate of personal loan, LAPs, says report

The economic implications of the COVID-19 crisis will have a significant bearing on all key retail lending product categories. Drop in approval rates during the COVID-19 pandemic is most acute for personal loans and loans against property (LAP), said a report published by information and insights provider TransUnion CIBIL.

In a bid to map potential changes across the major retail credit categories, the report compares the present COVID-19 situation with insights from the 2008/2009 global financial crisis.

“Despite the government's relief packages, the social, financial and economic impact of COVID-19 will be far-reaching and will lead to a realignment of the retail credit market," said Abhay Kelkar, vice-president of research and consulting at TransUnion CIBIL.

He further said lenders need to realign their strategies based on risk appetites and implement analytics-driven risk and collection management practices to minimise the impact of emerging risks.

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The 2008/2009 global financial crisis lasted for around six consecutive quarters, and both retail credit inquiry and origination volumes fell by almost 50 percent YoY. The current crisis is not as severe. In fact, there is likely to be a reverse effect, with secured lending products seeing the more pronounced decline, the report states.

“Unlike the last recession, we anticipate demand for products that provide much-needed liquidity like credit cards and personal loans as consumers will seek funds to bridge any personal finance gap," Kelkar noted, adding that demand for secured lending products like auto loans and home loans is likely to remain weak for some time.

The report also predicts a fall in the approval rates for all retail lending product categories. The drop in approval rates during the COVID-19 pandemic is most acute for personal loans (-30%) and LAP (-28%), the company said in a report released on June 11.

LAP and personal loans are typically seen as higher risk. LAP is popular amongst smaller business owners, and the irregular cashflow concerns due to COVID-19 is a significant issue. Similarly, personal loans, which are unsecured in nature, also represent an increased risk of default.

"A drop in approval rates for all major retail products is expected as lenders are likely to tighten their credit policy and customer selection norms, given the inherent risk of products like LAP and personal loans," Kelkar added.

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