COVID-19 and the Lending Industry: Negative Impact and Projected Solutions

It was in December 2019 when the spread of COVID-19 began. With cases continuing to rise, it has started to cripple the economy. The pandemic negatively impacted the financial industry, most notably the lending sector.

Up to this day, it is still unknown when this pandemic will end. As its negative effect continues to impede the operation of lending companies, financial analysts had already made a plan to help the industry rebuild when all of this chaos is over.

The Negative Effect It Brought

Personal loan demands have reduced ever since the outbreak started, combining with the significant decline of credit supply from all lenders across the board. The decrease in loan demands is thought to be the result of job insecurity and doubt in the economy.

The product and services that personal loans were mostly used for became unnecessary as the outbreak continuously wreaked havoc on our economy. This became a factor in why there’s a decrease in loan demands.

One of the challenges the lending industry is facing today is the repayment issues resulting from the government’s plan to contain the outbreak. Many people have lost their jobs after governments worldwide imposed a lockdown for everyone’s safety.

Business owners who borrow money from lenders ceased their operations, which led to repayment struggles. As this issue continues, lending companies are losing a large amount of money every month.

All of these reasons, along with other factors hampering the operation of lending companies, place the industry in a recession that is estimated to continue until the COVID-19 problem is resolved. Until then, the industry will have to wait and endure the impact COVID-19 brings.

How They Plan to Recover

Questions have begun circulating. “Will the economy bounce back sooner as the COVID-19 pandemic ends?”

According to some economists, the answer is yes, especially if the economy was strong before the pandemic started. It would not be difficult for the economy to recover when the operations of businesses finally return to normal.

The same goes for the job sector. The moment businesses resume their operations, people will also get their jobs back, which in turn would be good for the lending industry. Repayment issues will be fixed as borrowers can finally continue repaying out their loans.

But the most critical question remains: “How would the lending companies recover from months of loss?”

Based on the recovery China achieved after announcing that they have zero COVID-19 cases, economists are very optimistic that other countries can recover using the same strategy used by the country.

The debate between the V-Shaped” and “U-Shape” recovery strategy began due to China’s quick recovery. It is said that V-Shape recovery would be the best-case scenario, where the economy undergoes a steep fall but recovers quickly.

However, the more the virus spreads out extensively, the more the hope for the V-Shape recovery slowly vanishes. If this continues, the economy might have a slower recovery rate.

Both “V” or “U” shaped recovery would be impossible, as per Mark Zandi, Moody’s Analytics’ chief economist. He stated that it would probably look like a “Nike swoosh” than a V or U. The economy will find it difficult to recover due to the widespread impact of the pandemic.

The first month of being free from the coronavirus will be difficult since many borrowers might still be unable to repay their debts even after gaining back their employment status. Many will likely prioritize other necessities than paying off their loans.

Lending companies, on the other hand, may operate, but repayment from borrowers is expected to be still at its minimum. Every individual will be in recovery mode for the first few months, paying utility bills, and debts acquired before and during the pandemic in a slow but stable process.

Compound interest is also one of the ways lending companies can cope with the loss during the lockdown. Accumulated interest from loans that are not paid throughout the lockdown is expected to be paid when the business re-opens.

As of now, lending companies are using technology to cater to their borrowers’ needs without putting their lives at risk. Online applications for loan and online repayment plans are helping the lending companies continue their operation amidst the pandemic. This approach is the only way lending companies can survive the recession. However, repayment is expected to be lower due to the unemployment status of the majority of its borrowers.

As of now, seeing China’s economy bounce back stronger like it was before is the only hope economists see. Businesses all over the world, including the lending sector, have already resumed their operations, although with safety measures included. However, despite the restrictions, safely continuing operations can jumpstart our journey to recovery.

Takeaway

Financial analysts are looking to find a solid plan for recovery that the entire world can utilize.  Planning the economy’s recovery ahead of time will give us an advantage when everything finally goes back to normal. As of the moment, the most important thing everyone should focus on is the safety of each individual. Putting an end to the pandemic must come first before we can start healing our economy.

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