Exus Blog Article
Covid plunged the world into debt. What should collections do now?
In the developed world, debt surged above 432% of GDP in the third quarter of 2020. In emerging markets, meanwhile, debt levels rose to over 248% of GDP, with Lebanon, China, Malaysia, and Turkey experiencing the biggest rises in debt. And it’s going to be up to banks and collectors to pick through the rubble and put the pieces back together – preferably with good debt collection strategies and the digital solutions needed to carry them out.
Navigating the debt tsunami
2020 was a decidedly muted year for the collections sector, with a substantial decline in overall balances and a decline in overall credit accounts. Financial companies both big and small were struggling, and with creditors struggling just as much, there is always going to be a balance that needs to be struck.
But whereas small business owners and individuals who have fallen into greater debt as a result of the pandemic are seen as largely sympathetic characters by the wider populace, debt collectors are unfortunately not afforded the same courtesy. Indeed, they are a sector of the financial services industry that has arguably been vilified due to a small number of rogue agents using predatory tactics.
With that in mind, how can collectors and their teams hope to move forward in 2021 as the long-term effects of COVID continue to persist and evolve?
While the public health impacts of COVID-19 will hopefully decline sharply as more and more people are vaccinated, the long-term economic impact is going to be felt in the substantial debt left in its wake. Global debt has grown by an eye-watering $19.5 trillion as a direct result of the pandemic and while governments and banks managed to halt an immediate economic downturn using payment holidays and furlough schemes, that holiday will soon be coming to an end.
It should also be noted how dramatically the pandemic affected customer service channels, with fewer customer service representatives available to answer phones due to absent workers and cutbacks. Some agencies and banks allowed staff to work from home but in many developing countries, this simply wasn’t practical as the infrastructure and resources that would allow for this simply were not there.
With more customers calling to defer mortgages or credit in such uncertain times, the fact that there’s nobody there to take their call could lead to a mass exodus. Investing in digital options is a major aspect of this, of course, but customer retention is just one of many challenges lenders will face in the coming months.
What the collectors are saying
Generally speaking, debt collectors have been arguing en masse that they should be given a much larger role in collecting unpaid COVID loans. There are concerns now that up to 60% of borrowers might fail to pay back what they owe in the UK alone, which would result in an overall taxpayer loss of around £26 billion.
Once again, however, there’s the fear that if the banks chase up these loans they will once again be cast as “the bad guys.” And we all know how that turned out when it happened back in 2008. Banks have already begun building additional teams of collectors in anticipation of a wave of defaults when the payment holidays and schemes come to an end.
If they want to remain benevolent in the eyes of the general public they are going to have to really think about their collections tactics. Aggression is not the play here, what’s going to be required is a softer touch and a much heavier reliance on digital solutions.
The Credit Services Association has argued for an “active collections strategy” to be rolled out over the next three years. They believe they could save the taxpayer billions this way, whereas “a clumsy and ill-coordinated collections strategy may merely serve to undermine the benefits of the scheme.”
In Asia, meanwhile, more drastic reforms are being heralded as ‘the answer’ in preventing long-term economic scarring. These are the kinds of reforms that will boost productivity and investment, allowing for the reallocation of resources across sectors. Regulatory reform could play a large role here but there’s one major hurdle to overcome first.
Countries such as India, Sri Lanka, and Nepal all announced targeted lending schemes at the start of the pandemic, while Malaysia and Thailand provided extra liquidity to firms through central banking lending operations. Indonesia and the Philippines, meanwhile, used large-scale asset purchases. These are all incredibly aggressive policies that are going to entail some major risks the longer they are allowed to keep operating.
As more companies continue to struggle to generate enough income to service their debts and countries contend with public and private debts that might be too high for many to manage, it's going to be up to individual countries to reinforce private debt resolution frameworks. Otherwise, we’re going to start seeing a major wave of corporate bankruptcies.
What about business loans?
There has also been a substantial shift in business debt, of course. In the UK, as things stand, the £44 billion business rescue program is going to collapse into chaos soon when the rug is pulled out from countless businesses after all furlough and grant schemes come to a close. Many businesses are going to be forced to default on their loans as a result and UK debt collectors want to play a larger role in helping recover some of these debts.
There are still measures being taken to protect small businesses that are under the greatest amount of pressure. In the UK, several loans and schemes have been concocted by the government to keep businesses afloat, for example.
But even the most generous schemes are just a bandage on a broken limb for some and while the Bounce Back Loan Scheme looks good on paper, £50,000 will only take larger SMEs so far and that money will need to be paid back eventually.
Here comes the flood
2020 was a period of suspended animation in many regards for the debt collections sector. There’s every chance that 2021 will see consumer credit performance default to more typical patterns.
For the time being, most collections appear to have survived the initial influx of panic from the many customers who are dealing with financial hardship as a result of the pandemic. But after the tsunami of debt has settled, we’re going to be left with a flood.
Collections agents will have to get more aggressive and if this intensity is mishandled it could lead to lost customers. It’s a delicate balancing act that’s going to require a fresh approach and a greater degree of communication and transparency between creditors and debtors.