Economic impact of COVID-19 – The hard lessons

The human and economic devastation caused by the global COVID-19 pandemic is unprecedented and difficult to imagine. It has affected more than 5 million people all over the world and already killed more than 339K people. In the US alone, more than 96K people have died.

The sufferings and hardships of people the world over continue unabated, even as its full impact is being assessed, understood and assimilated into our collective ecosystem. But the priority now, and rightly so, is the full containment and the simultaneous development of appropriate vaccine and medications to prevent the spread of this deadly disease.

The economic impact of the deadly disease has been jaw dropping. According to data released by the US Bureau of Economic Analysis (BEA), the US GDP shrank by a mind boggling annual rate of 4.8% in the first quarter of this year.  Over 38 million people have filed for unemployment claims and the numbers are likely to only go up.

Travel and hospitality industry - Airlines, hotels, restaurants, rental car industry are among the worst hit sectors of the economy. Not to mention the travails of millions of small businesses that live on daily incomes. Many big name retailers have already filed for bankruptcy with multiple store closures.

In Europe the scenario is no better, with Italy, Spain, France and UK facing the brunt and suffering huge losses. The European Commission expects the EU economy to shrink by 7.5% in 2020 — far worse than the 2009 contraction of around 4.5%.

In Asia, China, Japan and India too have faced severe economic reversals. The plight of other smaller economies around the world has been equally dismal. So, all in all, the deadly virus that emanated from Wuhan in China, has inflicted an exorbitant toll on human civilization, confining them to their own homes in what is being euphemistically called home shelter.

The silver lining though, is that after a prolonged lockdown, the US and other governments are planning to reopen their respective economies in a phased manner. This will breathe new life into global trade and economy. But people will still be required to take precautions and wear masks when venturing out, something experts believe we may have to for a long time to come.

Even as the economies are opening up, it may not be business as usual, at least in the near term. Tourism, travel and hospitality industries may continue to face headwinds. Many people will continue to play safe and may not be inclined to travel unless absolutely required. This will significantly delay the recovery of these sectors to pre-pandemic levels. This in turn could adversely impact the broader economy. This may not bring cheer to economies that depend heavily on these sectors for sustenance.

According to the European Parliament, travel, tourism and businesses that depend on them contributed 10.3% of EU’s GDP and employed 11.7% or approximately 27.3 million workers in 2018. Given the dependence on travel and tourism, this may not be good news for Europe.

In the USA, travel and tourism industry’s contribution to the GDP in 2018 was 7.8% at US$ 1.87 trillion. However, the sector‘s share of GDP has gradually declined from 1999 to 2018. In the case of US, while the impact will still be significant, it may not be able to negate a swift recovery powered by federal financial support such as the CARES Act etc. From this perspective, the impact to US economy may not be as profound as felt by Europe.

In China, per data published by tradingeconomics.com, revenue from tourism accounted for about 11% of GDP in 2018 amounting to US$ 836 billion (1 CNY = 0.14 USD, May 2020). Bulk of the travelers came from Hong Kong, Macau, Taiwan and South Korea. The post pandemic travel to China will be greatly reduced thus impacting China’s overall GDP resurgence.

According to World Travel and Tourism, the industry generated US$ 240 billion or 9.2% of India's GDP in 2018 and supported 42.673 million jobs which is 8.1% of its total employment. While the impact to a post pandemic economy in India will be significant, it would be significantly less than that experienced by China and European Union.

It will be fair to assume that the speed and depth of post pandemic recovery will be different in different countries.  In the case of China, it may be a saga of struggle against multiple challenges. Apart from a weak travel and tourism sector, the country faces potential threat of flight of capital and relocation of key industries to other ‘friendlier’ countries. Souring trade relations with its biggest trading partner, the US, will also be a key factor that could swiftly turn into a tipping point.

Whichever way we look at it, the expected slow recovery of travel and tourism industries will   significantly dampen global economic recovery, albeit, the impact on some counties will be more profound than others.

This piece is certainly not a pontification on the health of the global economy based on the fortunes of a single sector of the broader economy. That would be the equivalent of reading the crystal ball. But it nevertheless gives us credible insights into what may be in store for us on the path to global recovery. More importantly, this piece is also not an elegy to a woeful future ahead for us.

But most definitely, there are hard lessons for the world to be learnt. The pandemic, all said and done, appears to be an equal opportunity destroyer of economies and has forced a global reordering of economic fortunes of human civilization as we know and understand it today.

Most leading economies have been bought to their knees so quickly and so unexpectedly that most of us don’t seem to have understood what has hit us, economically speaking. Who knows, it is probable that the pandemic is an early indicator of nature’s way of hitting the reset button – to a global economic order that seems to propitiate an unending consumptive appetite.

Enhancing Credit Risk Management

Image: Unsplash

It is common knowledge that large volumes of data are being constantly generated and a good portion of this can be used to better understand a potential borrower. This profusion of data has only provided greater depth and reach to lenders. The emergence of alternative data as a catalyst in expanding credit delivery and financial inclusion is unmistakable. It not only expands the scorable population but also deepens the understanding of their payment behavior.

The popular saying “the only thing that is constant is change” applies to the way lenders use technology and scoring solutions to understand the creditworthiness of applicants. Credit Risk Management has come a long way from the days when banks used one credit score cut off to decision loan applications. Risk managers now have a plethora of solution options to craft a credit policy that hits the right balance between risk and reward.

Traditional vs. Alternative Data Defined

Traditional data typically refers to data that credit bureaus maintain on their files. This includes data from loan applications, credit lines, loan repayment history, credit inquiries, and public information like bankruptcies. Traditional data is FCRA compliant and the acid test is that it must be verifiable and disputable by the customer.

Industry research has shown that scoring solutions that use traditional data cannot score a significant section of the population. According to the Consumer Financial Protection Bureau (CFPB), these ‘credit invisibles’ number over 45 million people¹. It further points out that although this segment of the population may not have a regular loan payment track record, they may still be paying their other bills regularly. And for this reason, it is very important to track this payment history – e.g. utility payments – to estimate their credit risk.

Definitions of alternative data may vary, depending on where you look. But in a broad sense, it pertains to data that includes, but is not limited to rent payments, mobile phone payments, cable TV payments as well as bank account information, such as deposits, withdrawals or transfers.

The Pros and Cons of Alternative Data

While alternative data has a very important role in financial inclusion, it also has other important benefits. In addition to improving the assessment of the risk of the customer, it can provide timely information to lenders on activities that may not be reflected on bureau data. Further, it enables lenders to provide enhanced customer experience. For example, when they share an online bank account, the loan application processing may be faster.

Like traditional data, alternative data is susceptible to inaccuracies. Consumers may not be able to readily review and correct alternative data although the standards governing it are constantly changing and evolving to meet customer and regulatory expectations.

 

 ¹ Kreiswirth, Brian. “Using alternative data to evaluate creditworthiness.” 2017. //www.consumerfinance.gov/about-us/blog/using-alternative-data-evaluate-creditworthiness/

## Risk Intelligence #CreditRiskManagement   #AlternativeData   #Bank  #CreditCard

Serving Everyday America: Products and Services for the Non-Prime Market - #Lend360

I had the opportunity to participate in the #Lend360 event in Dallas, Texas (Sep 25 – 27 2019) as a speaker. It was a great event that focused on online lending industry, especially Fintechs, with over 800 lending professionals and sponsors in attendance.

 I was a member of the panel on “Serving Everyday America: Products and Services for the Non-Prime Market”. I spoke on how #Alternativecreditdata enables lenders to understand and reach their customers in three big ways.

Alternative Credit Data is now being used by prime as well as non-prime lenders to book new customers. By using a host of new generation Fair Credit Reporting Act (FCRA) approved credit risk solutions, lenders can now understand their customers better and hence tailor products and services accordingly. Alternative data is also a key component that can help expand #Financialinclusion initiatives to deliver financial services to the hitherto unserved sections of society.

In my discussions I highlighted the following three -

 1.     The US has an estimated 53 million adults who are outside the purview of traditional credit bureaus. It is now well known that alternative data can identify and score approximately 90% of this population

 2.     Secondly, alternative data enables lenders to differentiate between consumers with similar traditional credit bureau profiles. This is because it can provide granular segmentation and a 360 degee view of applicants that is possible only when we use FCRA compliant not-tradeline data.

 3.     Thirdly, from an acquisition perspective, whatever segments the lender targets using alternative data, for the same risk – or charge offs – alternative data is capable of booking more accounts.

Will Financial Inclusion make India a US$5 trillion economy?

In his second term in office, Prime Minister Modi has talked about making India a US$ 5 trillion economy by 2024-2025¹. This has not only generated a lot of debate in India and but also has focused world attention on the Indian economy.

Many may think that this might be a tall order for a country that till recently was home to the largest number of utterly poor in the world. But the truth is that India may be closer to this target than we may realize.

While all sectors of the economy have to grow rapidly, the financial services sector has a key role to play to reach the mark. By stepping up its inclusive program that provides equal access to loans and other financial services to all sections of society, it can create a multiplier effect.

The obvious link here is that when a larger number of people borrow, especially the poor, increased economic activity follows leading to growth in sustainable means of income for broader sections of society. This, then helps rupture the “vicious cycle” of poverty.

Public policy planners, to their credit, have long been aware of the direct relationship between financial inclusion and swift economic growth. In fact, in 2005, Dr. YV Reddy, the then Governor of the Reserve Bank of India (RBI) had talked about financial inclusion in his annual policy statement². In 2008, the Dr. Rangarajan Committee on financial inclusion³ recommended a national mission to facilitate required policy changes.

Despite all this, India’s progress had obviously been slow in the past. But the economic fortunes of the poor have changed for the better – quickly and noticeably – only in the last decade. A report published in the Times of India (TOI) in January 2019 quoting World Data Lab showed the steep fall in poverty in India and estimated the current ‘extreme poor’ to be around 50 million.⁴ [According to the World Bank, ‘extreme poor’ are those who make less than $1.9 per day.]

It is important to see the declining poverty levels in the context of the massive digital revolution that is taking place in India in parallel. Contrary to what the electronic and print media in India may have you believe, the digital revolution on multiple fronts has aided and catalyzed the financial inclusion programs of the government.

As of December 2018, 1.23 billion people had Aadhar digital biometric identity cards⁵ and over 1.21 billion had mobile phones.⁶ Also, as of 2017, 80% of adults had a bank account .⁷ Bulk of the new accounts were opened with the aid of Aadhar identity cards.

Further, the country has also seen steep rise in mobile payment transactions. According to the data released by the National Payments Corporation of India (NPCI) ⁸ transactions via the Unified Payments Interface (UPI), the country’s flagship payments platform, grew 25% and crossed Rs.1 trillion in value in December 2018.

However, millions continue to live in poverty. India has a low credit access with only 154 loans per 1000 adults⁷. This may be attributed to the reluctance of lenders to lend to people whose credit worthiness cannot be reasonably assessed. Unlike the US, India does not have robust credit reporting agencies with depth of data that can help lenders in approving loans. This remains a major challenge for credit expansion.

The good news, however, is that the confluence of mobile penetration, establishment of a biometric identity and the emergence of disruptive credit risk solutions that facilitate the identification and assessment of borrower risk may set the scene for massive credit inclusion process. Consequently, India’s efforts to eliminate poverty may have reached a tipping point.

Many fintechs around the world and in India are now using a consumer’s digital identity to predict loan repayment behavior. In a report published in September 2018, the Federal Deposit Insurance Corporation (FDIC) of the US has reported⁹ that a predictive “model that uses only the digital footprint variables equals or exceeds the information content of the credit bureau score”.
In other words, lenders in India will now be able to assess credit risk of borrowers by using their digital identity. This also simultaneously obviates the need to build credit bureaus using traditional data – an expensive and time consuming effort in any case.

The purpose of this piece is not to speculate if India will reach the US$ 5 trillion mark by 2024-25, but to rather assess its preparedness in setting in motion a host of services and programs that will benefit the largest number of poor.  As is obvious, lifting millions of people out of poverty is a multi-pronged, multi-mission driven exercise where the happy meeting of cutting-edge technology and robust political will to execute the mission are necessary and imperative conditions.

India has adequately demonstrated its capability to execute complex projects on time and within budget. This augers well for the extreme poor. If they rise up above poverty, so will India, economically speaking, and crossing the US$ 5 trillion mark may just be one of the milestones.
Modi’s achievements in this regard, as substantiated by data from multiple sources, are substantial and suggest that it is broad-based and truly inclusive. This is in stark contrast to the efforts of the earlier government led by Dr Manmohan Singh who claimed at the National Development Council that “the first claim on the country’s resources for development”¹⁰ were reserved exclusively for a particular religious community.

It is indeed debatable if India, in its tryst with destiny, ever managed to redeem its pledge, as Pandit Jawaharlal Nehru dreamt at that midnight hour in 1947. Definitely data suggests that even after almost six decades, the redemption of the pledge in terms of poverty eradication, was not even substantial.  But given the track record of the last five years, Modi’s tryst with India is taking it places and the poorest of poor are joining the bandwagon in their millions. And Modi has the backing of the state-of-art technology. Of course, the claim on the country’s resources for development will be inclusive and for all, not the exclusive right of a select few.


References
1.Goal to make India $5 trillion economy by 2024 challenging, but possible, says PM Modi
https://www.businesstoday.in/current/economy-politics/goal-to-make-india-5-trillion-economy-by-2024-challenging-but-possible-says-pm-modi/story/356407.html
2.Annual Policy Statement for the Year 2005-06 by Dr. Y. Venugopal Reddy, Governor, Reserve Bank of India
https://rbi.org.in/scripts/BS_ViewMonetaryCreditPolicy.aspx?Id=2217#1
3.Rangarajan Committee submits report on financial inclusion
http://archive.indianexpress.com/news/rangarajan-committee-submits-report-on-financial-inclusion/257905/
4.New data may show big cut in number of poor
http://timesofindia.indiatimes.com/articleshow/67705787.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
5.Number of Aadhar Card holders in India
https://en.wikipedia.org/wiki/Aadhaar
6.Number of Mobile phones in use by country
https://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use
7.Strategy for New India @ 75 – NITI Aayog
https://niti.gov.in/writereaddata/files/Strategy_for_New_India.pdf
8.UPI transactions rise 25%, cross Rs 1 trillion mark in December
https://www.business-standard.com/article/economy-policy/upi-transactions-rise-25-cross-rs-1-trillion-mark-in-december-119010100767_1.html
9.On the Rise of the FinTechs—Credit Scoring using Digital Footprints
https://www.fdic.gov/bank/analytical/cfr/2018/wp2018/workingpapers-2018.html
19.Minorities must have first claim on resources: PM Manmohan Singh
https://economictimes.indiatimes.com/news/politics-and-nation/minorities-must-have-first-claim-on-resources-pm/articleshow/754218.cms

The emergence of alternative data in Financial Inclusion

The emergence of alternative data as a key enabler in expanding credit delivery and financial inclusion is unmistakable.

The saying that the only thing that is constant is change, is attributed to Heraclitus, the Greek Philosopher. This is so very relevant today in the way lenders use technology and scoring solutions to understand the credit worthiness of applicants. Credit Risk Management has come a long way from the days when banks used just one credit score cut off to decision loan applications. Risk managers now have a plethora of solution options to enable them to craft the right risk reward balance when they design a credit policy that would suit them.

It is common knowledge that large volumes of data are being constantly generated and a good portion of this can be used to better understand a potential borrower. This profusion of data has only provided greater depth and reach to lenders.

The emergence of alternative data as a key enabler in expanding credit delivery and financial inclusion is unmistakable. It not only expands the scorable population, but also deepens the understanding of their payment behavior. The three credit bureaus, realizing the value of this data asset have embarked on an acquisition spree.

A basic definition of traditional data as well as alternative data will help understand the scenario better.

Traditional Data 

Traditional data typically refers to data that credit bureaus maintain on their files. This includes data provided by the customer in the loan applications, data on credit lines, loan repayment history, credit enquiries as well as public information like bankruptcies. Traditional data is FCRA compliant and the acid test is that it must be verifiable and disputable by the customer.

Industry research has shown that scoring solutions that use traditional data cannot score a significant section of the population. According to the Consumer Financial Protection Bureau (CFPB), these ‘credit invisibles’ number over 45 million people. It further points out that although this segment of the population may not have a regular loan payment track record, they may still be paying their other bills regularly. It is thus very important to track this payment history – e.g. utility payments – to estimate their credit risk.

Alternative Data

Definitions of alternative data may vary, depending on where you choose to look them up. But in a broad sense it pertains to data that includes, but limited to rent payments, mobile phone payments, Cable TV payments as well as bank account information, such as deposits, withdrawals or transfers.

While alternative data has a very important role in financial inclusion, it also has other important benefits. In addition to improving the assessment of the risk of the customer, it can provide timely information to lenders on activities that may not be reflected on bureau data. Further it enables lenders to provide enhanced customer experience. For example, when they share online bank account, the loan application processing may be faster. 

Like traditional data, alternative data to is susceptible to inaccuracies. Consumers may not be able to readily review and correct alternative data although the standards governing it are constantly changing and evolving to meet customer and regulatory expectations.