Expect smaller loans, fewer specials this Christmas
Christmas loan specials from microfinance institutions are still being rolled out this year, but borrowers, especially those seeking personal credit, should expect less than half of the value of specials that were trending last year.
Small businesses can snatch a deal, but must be prepared to put up assets as collateral.
The more conservative shift within the otherwise easy-going, high-risk payday loans market comes as microlenders across Jamaica adopt measures to minimise the risk of repayments going bust, under the pandemic and the economic crisis it has spurned.
Small businesses and jobs have been hit hard during the spread of the coronavirus – areas that microlenders need to do well in order to keep demand for loans up, repayments steady and business revolving through their doors. For example, unemployment dropped five points back into double digits, at 12.6 per cent in the most recent jobs survey in July; and the economy has shrunk by around 10 per cent since the pandemic.
Year after year, Christmas loan specials from microfinance companies have included deals of up to $5 million, sometimes more, with repayment periods of around five years. But with COVID-19 uncertainties still lingering, some lenders have slashed loan values by as much as 70 per cent and shortened the repayment period for borrowers.
Loan rates, however, are flat.
“The COVID-19 pandemic is having a devastating effect on microfinance institutions as a result of its impact on the economy, especially the MSME sectors. Microfinance companies are seeing sharp increases in delinquencies, in the region of 60 to 70 per cent, and some are on the verge of bankruptcy,” said Raymond Gabbidon, executive director of the Jamaica Microfinancing Association, or JamFA, in an interview with the Financial Gleaner.
“Personal loans, particularly in the tourism sector, have been hard hit with the cutbacks and general downturn of the hospitality sectors, and the agricultural sector got a double blow from COVID-19 and the recent heavy rains,” he said.
Still aiming for profit
Still, while moving a lot more cautiously, microlenders are still looking to entice borrowers in one of the most lucrative commercial periods of the year, in hopes of making up some of the business that has evaporated since COVID emerged in Jamaica in March.
Large lenders like Lasco Microfinance are taking bets on what is classified now as “safe” business with its ‘Chrismus Come Early’ loan special, largely targeted at small operators in the grocery and manufacturing businesses.
The loans to the business owners are repayable over periods ranging from three months to two years.
“We do have a campaign running, but we have scaled down significantly. We have reduced the amount we are lending, and we are pushing the aspect of a shorter loan cycle” said Product and Sales Manager of Lasco Microfinance, Marshalee Burrell-Johnson.
“We believe that the specials we have now will enable our customers to get back on their feet for the upcoming year without putting them under undue pressure of an extended repayment period,” she said.
New Era Financing, a smaller financing house, lifted its processing fees on loans since the onset of COVID-19, and during December is offering customers lower monthly instalments and extensions of up to six months on loan repayments.
The microlender, which primarily does bridge financing, has not tightened its lending policies, according to Deputy CEO Andrew Mais, who said the measures New Era employed before COVID were already robust.
“We have not taken a blanket approach because of COVID. Yes, we are cautious, but we take a more optimistic approach that with prudent oversight and working with the clients on a one-on-one basis, we are likely to see a different side of things,” said Mais.
“And they appreciate the confidence, because nobody wants to feel like they’re being shut out of the financial system,” he said.
Because of the risk that microlenders assume, they charge high rates ranging up to around 70 per cent, and beyond, for the loans they distribute.
Other lending institutions that sell loans to micro and small businesses within the formal financial system, such as credit unions as well as the banks, offer much lower rates, but their loans are much harder to qualify for and requires collateral that the typical payday borrower doesn’t usually have.
This Christmas, some are looking to meet the market midway. Community & Workers of Jamaica Co-operative Credit Union and JN Bank, for example, are both willing to offer customers up to $5 million in unsecured loans.
“Reduced interest rate is obviously important to customers, and so we continue to run our unsecured loan offer of up to $5 million at interest rates of 15 per cent, and secured loans as low as 6 per cent,” said Community & Workers CEO Carlton Barclay.
However, new measures introduced at Community & Workers of Jamaica to keep delinquency rates low could result in the institution lending most of that money to persons employed in the government services – the sector least affected by the coronavirus outbreak in relation to job cuts.
“We have a lot of exposure to the tourism sector, and that has been the hardest hit. What we have managed to do is, on an individual basis, negotiate a moratorium for most of them, refinanced loans where we could, and some loans have genuinely gone bad,” said Barclay.
“With all of that, we have managed to maintain our arrears at low levels. Hopefully, as things gradually come back to normal, we will be able to fully lend to that sector again,” he said.
Community & Workers of Jamaica, which is the largest credit union by assets, has also been loud in its promotion of an auto loan special that offers customers a nine-month moratorium on repayments. The special, which runs to the first quarter of next year, has largely been taken up by public-sector workers.
JN Bank has not been specific about the sectors it is targeting through the ‘We take your plans personally’ campaign it started on Wednesday, but notes that the promotion allows customers to borrow up to $5 million towards renovation, travel, gift giving or debt consolidation, with no collateral required.