Lessons from office COVID-19: What's Next for the credit lending sector?
As Botswana grapples with the second wave of COVID-19 infections, it is becoming increasingly evident that there is no quick solution to the dynamics that are currently playing out. But in light of possible further waves of the pandemic, Batswana and the markets will have to continuously adapt to a rapidly changing environment.
The credit lending sector is no exception, and all lenders, be it banks or microfinance institutions, have been impacted to different degrees by the pandemic.
A tightening credit environment
All lenders have been forced to tighten their credit policies in response to the uncertainty brought about by the pandemic. At this stage, it is unclear what impact the second wave will have on the economy, and whether the projected growth of 8.8 percent will be achieved in 2021. Talk of possible third and fourth waves before herd immunity is reached adds to market uncertainty.
As signalled in the recent budget speech by the Minister of Finance and Economic Development, Dr Thapelo Matsheka, we do anticipate a change in monetary policy as a result of upward pressure on inflation, although this is expected to remain in the Bank of Botswana’s target range of between 3 percent and percent.
The increase in the VAT rate from 12 percent to 14 percent, alongside an increase in fuel tax of P1 per litre, will impact on the disposable income of everyone, although there is some relief for those earning P4,000 per month in the form of a higher tax exemption threshold.
As a result, the credit lending sector will be much more fixated on containing non-performing loans, which means there will likely be a tightening on lending. Loans to higher risk SMMEs are likely be harder, notwithstanding government’s efforts to assist businesses through the Industry Support Fund (ISF).
With government focused on reducing the public sector wage bill from its current levels of 15 percent of GDP to 10 percent in the short to medium term, competition for market share among payroll-dependent lenders is expected to increase considerably. The competition inevitably will lead to innovation that will benefit consumers, and we expect rapid digital transformation to follow.
Lessons from a black swan event
COVID-19 took everyone by surprise, with sales reducing significantly under hard lockdown restrictions. This is a scenario that no one had planned for in their risk assessments. The biggest impact to the sector has been the inability of customers to visit branches and transact on their business, especially moving between zones made people reluctant to travel. Yet customers insisted on talking to us, which demonstrates the need for two-way communication.
With hindsight, we realise how misleading the power of perception can be, especially as most businesses originally regarded news of the pandemic as being about something similar to SARS should that be contained within a few countries and overcome.
The main lesson learnt, and something we’ve integrated into our risk assessment, is to plan for the worst. The sector should have positioned itself differently some time ago, finding ways of serving and educating customers on financial matters virtually.
Rapid digital transformation
Within this crisis lies an opportunity. We anticipate that COVID-19 will stimulate rapid evolution of online credit processes, especially as government continues to roll out online connectivity as part of its Vision 2036 aspirations of turning Botswana into a high-income country.
Through technology, credit scoring will become much more sophisticated, which will allow for credit decisions to be reached within two hours, with same day payouts. Use of mobile services is likely to escalate rapidly. A lot of our clients, for instance, live in villages far from formal financial service centres, but almost everyone has a cell phone.
A driving factor in the success of mobile money will be education. To that end, we have already pushed the boat out by educating our agents to teach customers how to use the technology.
Protecting your credit record and good name
We have noticed a trend where people are living on credit, which is not sustainable. Borrowers also don’t always investigate the terms and interest rates of their contracts. A good credit record is worth its weight in gold, and Batswana would do well to shop around for the best service, advice and repayment terms.
Borrowers should take care not to overexpose themselves. The 40 percent minimum take-home pay threshold by government is a guideline and loans should only be taken if it is absolutely needed. Loans should also be paid off in the shortest amount of time possible in order to avoid unnecessary interest charges.