How Economic Uncertainty Has Seen Traditional Lenders Tighten Criteria

With the economy facing unprecedented times, banks and lenders have been adjusting how they lend to people and businesses due to the economic downturn triggered by COVID-19. But even before the country went into lockdown, there were signs that things were about to change. Back in October 2019, it was reported that banks were planning to reduce their lending in response to rising defaults and a fall in demand, with analysts citing that there was growing caution across the finance industry due to uncertainty over Brexit. The survey by Bank of England (BoE) found it was also widely expected that people would find it more difficult to get credit over the next three months going into 2020.In January, this was confirmed as BoE figures showed that banks were reining in lending at the fastest rate since the 2008 financial crisis and an interest cut was to be expected.

Months later and the effects of coronavirus has changed the landscape very quickly beyond what was predicted, with interest rates reduced by the BoE in March to 0.1%, their lowest ever level. The BoE survey found that the availability of unsecured credit for households would decrease between April and June after increasing slightly in the first three months of 2020, but suggested this will decrease due to the impact of COVID-19 and lenders unwilling to take more risks.

The Lending Risks

Due to an uncertain market, lenders have had to tighten their assessment criteria to be able to approve lending requests. With many people facing unemployment and employees across the UK either furloughed or on reduced pay, lenders have been put in a difficult position in terms of assessing lending risk as there are concerns customers may struggle to pay loans back. Many high-cost short term loan lenders have had to adjust, with it reported in March that some have temporarily stopped lending to new customers. Others that assess applicants based on their past 30 to 90 days financial history have found this is less reliable due to people’s situations having changed so quickly due to COVID-19. The Chief Executive of the Consumer Finance Association Jason Wassell said that “lenders that I have talked to are tightening their lending, and so the flow of credit is dropping; for short term lenders looking at the customers situation, the past 30 or 90 days are no longer a good indication of the next 90 days.”

According to research byClearscore, the choice of credit products has shrunk by over half as lenders have withdrawn products or tightened lending restrictions. Between 15 March and 7 April, the average number of loans or credit card available dropped by 59% on average.The reasons for the increased restrictions on lending to new customers is stemmed by lenders own financial uncertainty. The UK government’s coronavirus business interruption loans (CBIL) scheme was set up along with the job retention scheme to provide businesses with loans between £25,000 and £5 million to help protect them during lockdown. However, it’s reported that despite the financial aid available, some banks have insisted on personal guarantees from applicants to be able to access these loans. Barclays has told customers they will need to sign personal guarantees and HSBC has said loans over £100,000 would require this also due to the added risk during uncertain times. Not all banks are requiring this, with Royal Bank of Scotland confirming it will offer CBILs without asking business owners for personal guarantees. As of early May, £5.5 billion has been lent through the CBIL scheme through 33,812 loan approvals.

Customers Finding Other Sources

The effect lending restrictions are having on customers is being felt all over the country. Mortgage holders and those with overdrafts have seen help in terms of payment holidays as well as reduced overdrafts fees. 1.5 million payment holidays of up to 3 months have been granted on credit cards and personal loans by high-street banks as of the end of May, with mortgage repayments able to be paused until the end of October. Whilst this is good news for those with borrowing, those that are trying to access new loans or credit cards have struggled, especially low-income borrowers. Where people have needed financial support, alternative options through subprime lenders have also reduced and seen tighter restrictions.

As of 5 May, 2.5 million claims for welfare payments were made, and without the option of being approved for a short term emergency loan, many people are facing financial difficulty and having to opt for unregulated sources or loan sharks. According to figures from Citizens Advice Bureau, 13 million people have been unable to pay or expect to miss at least one bill due to COVID-19. Of this total, 11 million have missed or expect to miss a bill payment that would leave them vulnerable to facing eviction, bailiff enforcement or disconnection of services when government protections end. According to Chief Executive of Citizens Advice Dame Gillian Guy, “The government’s comprehensive measures have, for now, eased the financial burden for lots of households across the country. But millions still have reason to fear the looming financial cliff edge when these protections end.”

The risk of people choosing unregulated sources for lending because they have nowhere else to turn is a concern, with the England Illegal Money Lending Team, who investigate and prosecute loan sharks, saying any spike in loan shark activity may not be visible until 2023 due to those that use them taking an average 2.75 years to engage with authorities. Since the beginning of April, nine companies offering debt advice have been placed on the Financial Conduct Authority (FCA) blacklist of unauthorised firms. In March, due to the concerns of a rise of unregulated firms taking advantage of the coronavirus situation, MPs urged the government to grant further regulatory powers to the FCA to help bring them in line with regulations.The FCA has contacted 13,000 financial firms at the beginning of June asking to complete a survey to provide them with an accurate view of their financial resilience as a result of COVID-19. The hope is this will provide a long-term view of how the future will look post-coronavirus once the economy begins to pick up and what will still need to be done to support consumers and businesses alike from the ongoing impact.

For anyone looking for additional support during financial difficulty, both the Money Advice Service and Citizens Advice Bureau provide impartial advice to help. If you are unsure if a lender is regulated, please check the FCA Financial Services Register to check. For further insight from Wizzcash, please see the articles below: