If 2020 has taught us anything, it is that “we can’t predict the future.” Who would have thought that a year that started with wildfires in Australia would end with a global pandemic?
Community banks and credit unions saw massive demand on their loan departments. Between record-low mortgage interest rates and PPP loans, requests for loans were at an all-time high. And just as lenders might begin to take a breath at the end of the year, another round of PPP funding was signed into law.
The end of one year is always filled with predictions for the next. After the year we’ve all had, this almost seems laughable. That being said, assuming a modicum of normalcy once the COVID-19 vaccine becomes widely distributed, here are our humble predictions for 2021.
Rebuilding Customer Relationships
In many ways, 2020 felt like survival mode. We were physically separated and our focus pulled in a million directions. Lending was about reacting quickly to customers’ demands.
2021 will be about rebuilding the relationships with your customers. However, these relationships might look different. As banks and credit unions needed to change the way that they interacted with customers, some of these changes will be permanent.
There will be an increased demand for digital services, including secure form fill and secure file transfer. Video, chat, and collaboration technologies will remain present for customers that still want a contactless experience.
Recovery Will Take Time
As more PPP loans become available again, businesses will continue to squeak by. Many folded quickly and others may continue to hang on until a vaccine allows them to increase their operations.
However, the overall impact will be felt in many industries, perhaps for years. Some may have permanently altered their business model. Others depleted their reserves so much to survive that it could take a long time to rebuild.
It is likely that many industries like hospitality, travel, and restaurants will recover even more slowly. Increased comfort amidst a population where COVID-19 becomes less prevalent is still a far cry from large crowds and a population on the move.
Businesses Will Continue to Struggle
While some of it has likely already crept onto the weekly past due reports, community financial institutions will continue to see slow pays on their loans from businesses that are struggling. As lenders emerge from the mortgage and PPP demands, part of the relationship building will include work-out plans with their borrowers.
Other businesses may have an increased need for lines of credit or working capital. Underwriting these loans may be trickier due to poor recent financials and difficulty in predicting recovery for these businesses.
Lenders must weigh the risk against how a potential loan might help the business. Stress testing may help understand the level of risk, but we have also been facing unprecedented, widespread disruption in how businesses operate. Lenders will have to rely on their relationships with their borrowers as much as the numbers.
Managing Credit Risk in Your Loan Portfolio
As you look to 2021, take a deep breath. We’ve made it through 2020.
Banks and credit unions will continue to play a critical role in the rebuilding of businesses in their communities. The access to credit is going to be a key factor for many small businesses to get back on their feet.
With sound lending practices and effective credit risk management, you can be there to meet the challenges of your borrowers, in 2021 and beyond. To learn more about how the Square 1 Credit Suite can help your financial institution, contact us or schedule a demo today.
