Loan values are down 70% year-on-year. That was the stark finding from the Carnegie UK Trust and Community Finance Solutions at University of Salford research survey of not-for-profit affordable credit lenders, as revealed in June 2020.
The survey was followed by a detailed analysis of the findings in a report ‘Fear and Loaning‘ published in August 2020.
More than 60 Credit Unions and Community Development Finance Institutions (CDFIs) in England, Scotland and Wales participated in the study. Taken together, these firms represented almost half of Great Britain’s credit unions by savings held and loans issued and over 20% by membership.
Five of the six largest personal lending CDFIs also took part in the survey detailing the impact of Covid-19 on their loan demand and quality, lending volume, income, liquidity, viability, and confidence. Their responses turned anecdote into evidence, confirming what was known from commercial credit lenders; right now, lending is tough for affordable credit providers.
Collectively, Credit Unions and CDFIs reported a sharp decline in the number of people seeking loans, and a reduction in the amounts sought by those who were. They confirmed a rise in the number of customers seeking payment holidays on their loans; and an increase in saving deposits.
Across all those surveyed no credit union or CDFI had seen an increase in lending; the average drop reported was worryingly high; 70% comparing April 2020 with April 2019. This drop was irrespective of lender size or type. Subsequently, we are advised the month of May was better than April; June better than May; and July improved again, but damage has almost certainly been inflicted on some lenders’ operational sustainability. The survey will be repeated in October 2020 to see whether the improving lending picture reported over the summer is keeping the boat afloat, or whether it is holed below the waterline.
Mitigation strategies are underway – affordable lenders are drawing on their reserves, where they have them, or accessing loans and grants from Government or other sources. No lender is unaffected. Over half of those surveyed had furloughed staff. Many had closed branches (sometimes with no prospect of reopening them), and deployed disaster recovery strategies, some better than others.
We know of affordable lenders where telephony failed and didn’t trip to mobiles, leaving customers with no ability to get in touch; some who found it impossible to do anything remotely, and shut their doors; and others who slipped money in envelopes under doors for customers without fintech solutions. Conversely, we know too of affordable credit providers seamlessly shifting to online channels, with an uplift in mobile apps downloaded across their memberships. Credit unions and CDFIs that shifted with relative ease to digital channels whilst retaining the relationship feel, lending to key workers and others who needed credit. We know of lenders that deployed loan underwriters to call vulnerable customers – not to check on their loan payment – to ask after their welfare.
The underperforming loan books alongside payment holidays and arrears leads to greater provisioning requirements for bad and doubtful debt. Moreover, the lack of demand – as household expenditure dropped by 40% to 50% around March, April, and May – affects the future pipeline. No loans today; no income tomorrow.
The Credit Union Loan Fund in Scotland offering subordinated debt at nil interest was immediately oversubscribed for the £2m available, with over a quarter of Scotland’s credit unions being awarded funds to bolster their balance sheets.
In England, the Fair4All Finance COVID-19 resilience grants saw 28 affordable credit lenders (Credit Unions and CDFIs) receiving over £3.6million in funds. The question is, will it work? The injection of financial steroids can stave off immediate challenges, keeping the patient alive, but only volume lending and tolerable arrears can really prevent long term damage.
The consequences are most perilous for those affordable lenders on the tightest margins. The 70% drop in lending was accompanied by a rise in savings – an across-the-board rise of 14%. This symbiosis of savings and loans is out of kilter; the rise in one (savings) and the decrease in the other (loans) results in an unforgiving stretch to regulatory capital-to-assets ratios.
65% of all those surveyed reported that they could meet short terms costs, this confidence was higher among large credit unions, (those whose average loans were higher than £2,000) where confidence was 74%, and lowest among the smaller ones, (those whose loans were typically under £1,000) where confidence was just 55%. A similar pattern was evident in responses to questions on their level of confidence about trading this time next year, with the larger lenders showing the greater confidence.
The most important question is, of course, why does this matter? At first glance, it may appear a positive development that fewer people have sought to borrow money in recent months, it was only July that saw an increase in consumer credit borrowing UK wide, following four months of net repayments.
However, there will be a range of complex reasons behind the drop in the demand for credit. It may be because people have had support through other channels set up in response to the pandemic, 9.4m employees furloughed on the Job Retention Scheme, or 27m bank accounts benefitting from a £500 interest-free overdraft, both of which are very positive interventions.
There have also been fewer opportunities for consumption during the crisis. Credit is to some extent an indicator of consumer confidence, and with rising unemployment and uncertainty around the impact of this, or future, health pandemics there will be a wariness among some around borrowing until there is a return to confidence.
Alternatively, however, some people may have not been able to seek a loan from an affordable credit provider because their financial position has worsened and they may have had to take other action, such as going without an important purchase or borrowing from family and friends. As the financial support interventions introduced in response to COVID-19 taper off and unemployment rises, household finances will come under severe pressure.
For many, often the poorest, the factors that determine their need to borrow will be as prescient as they were pre-COVID. Boilers will break, cars and washing machines too, the need for credit among low-income households, predominantly the 11m+ within the bottom two quintiles will become more important than ever.
If not-for-profit affordable credit providers are not able to be sustained and scaled to meet the needs of local communities, the threat of credit deserts for the very poorest is a real possibility. With incomes being hit and other forms of financial support retrenching, and without access to affordable credit, what are low-income credit deprived households to do? They may go through a period of utilizing savings, if they have them, go without or make do, before turning to friends and family, a sub-optimal solution which is both finite and not necessarily benign. Ultimately there exists a danger that a legal market that cannot address the needs of the lowest-income households leads to an illegal money lending solution. As Anna Ellison, from Policis said to the APPG in June 2020:
“We would see a reduction in consumer resilience and a fall in the supply and availability of credit. This could lead to a disorderly market and opportunities for criminals to take advantage of the resulting vacuum unless preventative steps were taken by regulators and criminal agencies”.
The need for affordable, socially driven, fair credit creates complex policy conundrums. The providers will likely reduce in number; the inexorable path to mergers among affordable credit lenders should perhaps be accelerated and supported. Meanwhile, mainstream lenders remain uninterested in small-sum credit. Solutions for lowest-income households are not easy. They need open-minded policy solutions, including a broader acceptance that pricing for risk means loans are not as cheap, as many would like.
The FCA has issued guidance to make it clear how local authorities and landlords can help people to find local affordable credit suppliers without fear of contravening any financial services regulations around introducers. Local authorities have an enormous reach; they have the ability to ensure ‘soft landings’ for the affordable credit lenders whose motivations and business models are aligned to the needs of low-income consumers. The communications utilised by local authorities could easily be amplified to endorse fair credit.
Efficiencies amongst affordable credit providers, through mergers, can reduce the cost of lending. Seeking assistance from employers, landlords and local authorities to increase the visibility and acceptability of affordable credit. There can be a reluctance from third parties to promote affordable credit, but the alternatives are harsher still – which none of us can afford.
niall@carnegieuk.org
@niall9a
