Banks will have to reduce their loan approval rate to 61% from the current 70% to maintain the bad loan ratio witnessed in 2009, a year after the global financial crisis, credit bureau Experian said in a webinar.
The numbers were based on its client banks’ financials.
The loan approval rate will further fall to 50% in case the economic impact of the COVID-19 pandemic is 10% higher than in 2009, the report said.
The incremental stress due to the ongoing economic crisis is likely to lead to a spike in default rates.
Under the baseline scenario, the normal payment default rate is 7.54%. However, if incremental
stress in the economy rises to 190%, payment defaults will soar to as high as 21.04%.
Under the baseline scenario, the payment default rate for home loans is 2.14%, and assuming the economic parameters deteriorate to the levels of 2009, the rate will rise to 3.73%. If the economic impact of COVID-19 is 10% more than the 2009 financial crisis, the home loan default rate will rise to 4.05%.
The asset quality of the unsecured portfolio of banks is also likely to be impacted, as 56% of unsecured loan amounts is in areas with a high density of COVID-19 cases.
Secured loans are also at risk, with 63% of such loan amounts being in areas with high COVID-19 density.
The COVID-19 pandemic will also impact banks’ future underwriting policies, account management practices, risk mitigation and customer experience strategies, the report said.
In a worrying sign, COVID-19 has already impacted retail loan volumes, with a significant drop in new loan enquiries, the report said. As per the report, there has been a drop of 65% in consumer generated enquiries received by banks, and a 72% decline in business generated enquiries.
Public sector banks have seen an 88% fall in new loan enquiries and private banks 92%, while financial technology and non-banking finance companies have seen a drop of 18% and 76%, respectively.