Impairments will be affected
First, as the payment holidays begin to expire, we should begin to see the true underlying impact on impairments. Given the volume of payment holidays extended, there are going to be significant data, process, capacity and conduct challenges to address as lenders work through who is performing, who’s on a watch list, and who is entering arrears management. We could potentially see an extension of these payment holidays. Whilst a downside in of itself, it might usefully allow more time to work through with borrowers what will happen as they come to an end.
IFRS9 challenges take the spotlight
IFRS9 challenges will also take the spotlight again, as interim reporting for many listed businesses in the sector will coincide with current payment holidays’ expiration dates. However, it is still too early to accurately predict the impact of this.
The severity of the situation will largely depend on the expected performance of the economy, which in turn will depend on the Government’s exit strategy. For newer businesses, this crisis represents a very rigorous test of their resilience, and for those that fare well, they will have been able to prove their ‘through the cycle’ resilience.
Beyond the crisis
The UK’s exit strategy will also determine what the resumption in credit demand will look like. Should there be a steep bounce back, significant operational challenges will occur again as lenders will be dealing simultaneously with the back book as well as new lending applications. Should it take longer, SMEs will be operating with more debt to service, which creates different challenges.
With front end operations potentially stressed, the industry will have to face a number of operational questions, including how it can minimise dropouts in applications and maximise new business opportunities. Over the long term, it will also be interesting to watch the behaviour of consumers and SMEs, and whether we’ll see a growing inclination to build up a cash buffer and an increased propensity to save.