A TSUNAMI OF DEBT IS ON THE HORIZON. IF HISTORY IS ABOUT TO REPEAT ITSELF - HOW CAN CONSUMER LENDERS PREPARE FOR THE INCREASE IN DEFAULTS?
There are five factors negatively impacting the global economy (high inflation, unemployment, deep recession, mounting debt and slow economic growth). If you cross reference that with the default rates of three of the largest asset classes: mortgages, credit cards, and auto loans, you will note that it's already taking a toll. We are starting to see an increase in credit card and auto loan defaults, according to data from S7P Dow Jones Indices & Experian. The US has not seen a big spike in defaults since 2008, so are consumer lenders prepared to handle the increase in defaults headed their way?
Is history about to repeat itself? Oil prices are on the rise across the globe and a debt storm is coming. Back in the 80’s there was a similar debt typhoon in Latin America triggered by two large oil price surges that disrupted finances and eventually collapsed economies. First Mexico in 1982, then Brazil, Chile, Argentina, Colombia, Venezuela, Peru, and Ecuador – all falling like dominoes in the face of a deep recession, high inflation, mounting debt, unemployment and slow economic growth. Does this sound familiar? Are we about to enter into a similar situation?
Right before Russia invaded Ukraine, the World Bank issued a warning that 70 developing nations face a looming debt crisis. Exacerbated by the Russian invasion of Ukraine (dramatically increasing prices for food and fuel), these countries face an even greater risk of their economies falling in 2022. Three risk factors play a role in 107 countries representing 1.7 billion people – or 1/5th of the population:
1. Rising food prices
2. Rising energy prices
3. Tougher financial conditions
How can the world prevent a global debt typhoon? Experts suggest:
1. Manage borrowing and lending better. Creditors should offer contingency plans to borrowers, like pausing repayments if the borrower faces financial difficulties.
2. Introduce better ways to manage surges and crises in low-income countries who are more vulnerable to external crises since a high proportion of their debt is foreign.
3. Promote alternatives to borrowing. Lower income countries face major public financing shortfalls even for basic public needs like health care and education, studies say. If these countries improve tax collection, they can reduce the need for borrowing more.
4. Increase accountability and transparency both for borrowers and lenders.
How can consumer lenders in the US prepare themselves for the increase in defaults headed their way? EverChain has 3 tips to help creditors insulate themselves from the impact:
1. Improve the efficiency and effectiveness of your recovery efforts by optimizing when, where, and how long you collect internally, place with agencies (which ones and for how long) and when to eventually sell (at the point of diminishing returns).
2. Sell your warehouse of defaulted accounts securely, easily, and compliantly, generating millions and ensuring that your consumers’ experience is the same post default as it is pre-default.
3. Review data on recent defaults and tighten underwriting criteria accordingly.
4. Increase accountability and transparency both for borrowers and lenders. You can read about how EverChain is increasing transparency on their website.
Data sourced from the following media outlets:
• Gravitas Plus: Which countries could go the Sri Lanka way? By Palki Sharma
• S&P Dow Jones Indices
Set a meeting with Brooke Teal to learn how we are helping consumer lenders insulate themselves from the impact of the upcoming recession and resulting increase in defaults.