AUS
NZ
UK
CA
USA
IND
Summary
- The chances of small and small duration borrowers being drawn into a spiral of debt are always high during times of financial crisis like the present one induced by the coronavirus pandemic
- Repeat lending to high-risk individuals increases the overall debt stress levels in the economy, which in this troubled time needs to be avoided
- The FCA is particularly concerned by the luring advertisements being put out recently by moneylenders in order to get more business, which could have a vicious backlash
Like all other types of businesses sectors, small money lending businesses in the United Kingdom have also been very badly affected by the coronavirus pandemic and the resultant lockdown. These businesses which thrive on very high rates of interests they charge from their borrowers’ work on a totally different business model that their larger counterparts do. In the aftermath of the lockdown, when most of the banks have been reluctant to give loans for want of better security or government guarantees, these small money lenders have run an advertisement spree to encourage people to borrow more money. These small loans which are often without security and carrying a very high cost, if added up would create a massive debt load for the economy altogether and would make people poorer and make the lending process for the entire country even riskier. The FCA’s (Financial conducts Authority) has warned of serious financial hardship for the repeat borrowers. The regulator’s warning has come after it reviewed the borrowing history of about 250,000 clients of these businesses who had availed guarantor loans, payday loans, rent to own products and doorstep credit. The regulator is particularly concerned by the luring advertisements being put out recently by moneylenders in order to get more business, which could have a vicious backlash
Small money lending businesses in times of crisis and cycle of debt
Businesses like small restaurants, individual food joints etc. are dependent to a large extent on their cash registers. They usually are lent for very short durations, for no security, or when there is a security, it is not adequate or shady. The high risks these moneylenders take is usually covered by the high rates of interests they charge from their clients. The business of these money lenders differs from the credit card companies in the sense that credit card companies ensure that there is a very high degree of safety in terms of client creditworthiness before they give out their cards. The kind of credit profile that the borrowers of small lending businesses have would seldom qualify for credit cards.
It is the business of these small money lenders to cater to the credit needs of people who would have difficulty getting loans from institutional lenders like banks. Thus, the risk of these people not being able to pay back their borrowings is also very high. Especially in times of crisis like the current one, people become more vulnerable, and their risk of getting into a cycle of debt is very high. Such a situation not only becomes difficult for the borrowers but also for the lenders.
The coronavirus pandemic and the deteriorating financial condition of people
The coronavirus pandemic has hit the people from the lower strata of the society the hardest. Many of those who earn their pay on a daily or a weekly basis, were suddenly devoid of their earnings as the lockdown was imposed. In the weeks thereafter, only those people belonging to organized and registered businesses were able to draw benefits from the governments furloughing scheme, but there were a lot of others who were left out and only had the small money lenders to their support. Self-employed people like taxi drivers, tourist guides, artists, very small business owners and several such people came under this category and did not have any alternative resource to support them through the crisis. Among the people who received the benefit of the furloughing scheme, their earnings were less compared to what they would have earned had they been into their regular work and were forced to spend far less. The uncertainty regarding how long it would take for the pandemic to subside and the country to go back to business as they did before was also playing to the psychology of the people and prompting them to spend more cautiously.
The government's recent stimulus packages and how has it impacted people.
The various stimulus packages announced by the government in the month of March had proved to be a good relief for the people when almost all business activity in the country had come to a standstill. The government granted soft term loans to small and medium businesses to help them survive through the pandemic ordeal and made all efforts not to let many businesses fail and people to get displaced. These packages though coming at a very high cost to the exchequer helped the British economy in avoiding a far greater economic downturn that could have been without these packages.
Since the opening of the lockdown in the first week of May, several industries have been able to bounce back rapidly because of the benefit of the stimulus packages they had been able to avail of. People were able to come back to work swiftly, and now according to the Bank of England (BoE), almost all the people who had been furloughed shall be back to work by the fourth quarter of the year. Despite the massive economic damage caused by the pandemic, the Bank of England believes that the country will be back to pre-pandemic levels by the end of 2021.
Outlook
The small-scale lenders are at the bottom end of the lending industry value chain in the country. Like all other businesses at that place, they have also been very badly hit by the pandemic compared to their larger counterpart. Their urge to rapidly scale back their businesses is understandable, but the risks they are assuming is far more than proportionate and will certainly lead to pitfalls which will impact the financial wellbeing of them as well as their customers who may end up in a debt cycle.
