Changing economic conditions as a result of the coronavirus (COVID-19) pandemic present a number of challenges to personal loan (PLoan) service providers, both commercial banks and non-bank financial institutions. Key challenges include how to adjust strategies to reach targeted customers faster than rivals in order to bolster new loans while also accelerating their efforts to assist PLoan borrowers. As a result, 7M20 outstanding PLoans contracted 3.5 percent, compared to the year-end 2019, and unsecured PLoans shrank at a faster pace of 7.5 percent, compared to the year-end 2019.
KResearch views that the contraction in unsecured PLoans since early 2020 reflects the impact of COVID-19 on the extension of new loans and non-performing loan (NPL) write-offs by commercial banks to proactively address NPL problems. Such a picture was contrary to that seen in 2019 when banks were accelerating lending. For the final quarter of 2020, we expect that commercial banks and non-bank financial institutions will face a more difficult task in accelerating debt restructuring to assist borrowers and preempt rising NPLs because various assistance measures for borrowers are scheduled to expire. Concurrently, the criteria for new loans will likely be more stringent and based on prudent credit risk assessment of borrowers as a prolonged economic slump will inevitably affect income, employment and debt servicing ability of borrowers. Against this background, KResearch expects that unsecured PLoans will contract 6.0 percent and NPLs of unsecured PLoans in the banking system will grow not more than 4.0 percent in 2020, thanks to financial institutions' proactive efforts in restructuring debt and addressing asset quality problems by writing off NPS.
Nevertheless, it is expected that banks and non-bank financial institutions will continue to focus on PLoans to help sustain their interest income. For non-bank financial institutions, they may slow their efforts in expanding their loan portfolios for low-income consumers and use pricing strategies to capture more medium-income customers. For banks, they may use their advantages in digital platforms/applications to develop a digital lending model (currently in a trail phase) to enhance their marketing via existing channels while also introducing special campaigns to target specific customers such as those using other financial services with banks or those using platforms of their business partners in order to take advantage of the linked database to reduce credit risk.