Big decisions for banks as insolvencies set to surge
A surge of insolvencies is expected in September, according to latest industry data and while the big four will have to make some hard decisions around further support measures, non-bank lenders may have to rethink their approach.
According to credit reporting firm CreditorWatch, unique data insights for the month of May a 9.5 per cent increase in defaults was recorded. Court actions and administrations also recorded an uptick at 11.5 per cent and 3.9 per cent respectively.
Monthly comparison - defaults, court actions and administrations
“The uptick in SME defaults is a warning sign that insolvencies will also increase,” Creditorwatch Patrick Coghlan said.
“Based on this data, there is likely to be a huge surge in insolvencies come September,” he said.
Since the health pandemic unfolded, the government announced support measures including jobkeeper payments for businesses.
Banks also responded by providing their SME customers with payment deferrals and courts were also on hold given the social distancing rules.
This has halted the level of defaults and court action as highlighted in the graph.
“We would have had 300 administrations that would have normally been recorded in April and May. That just has not happened.
“That is because these businesses are taking advantage of the because people are taking advantage of the safe harbour and insolvency legislation changes.”
However, as these measures will start to unwind, the outlook too will change.
Here, Coghlan (pictured below), sees firms will begin registering payment defaults against those people that owe them money.
Courts will also start to open, picking up the volume and backlog of actions against debtors.
“Inevitably, we're going to see a large increase in administrations,” Coghlan said
The most vulnerable sectors include hospitality and retail, which were always vulnerable but according to Coghlan, are now “dramatically worsened by the health pandemic”.
Construction will be somewhat protected through the government’s HomeBuilder grant scheme but Coghlan expects insolvencies in that sector to be delayed by 18 months
The big lenders have already provisioned for loan defaults through their respective COVID-19 overlays.
To date there 215,444 business loans deferred as at June, according to data from the Australian Banking Association.
He sees banks already checking and engaging with their SME customers but some hard decisions will have to be made around whether to support and restructure the debt of a business.
One approach would be to add another six month deferrals if banks have assessed that a business can work its way out of the current challenges.
For Coghlan, a number of businesses have been able to survive because of the government support measures.
“The issue at the moment is the banks have done their job by being Team Australia,” Coghlan said.
Banks will have to start identifying which businesses are going to survive and which, of course, not.”
There are of course challenges for the non-bank lenders.
In fact, in its most recent trading update, Prospa announced that it had temporarily adjusted its underwriting parameters and credit assessment model “in prudent response to changing economic environment”, resulting a “material” fall in origination volumes in April and May
For Coghlan, bigger non-bank lenders like Prospa do have cash in the bank and access to debt, which is positive.
But there will also be bigger challenges for non-bank lenders in the smaller end of the spectrum.
“My expectation is that there will be significant consolidation among non-bank lenders particularly as some bigger names could even move way from unsecured lending.
“And while these lenders might have a government guarantee that will end. We might see some mergers as a result.
“In that space it is going to be extremely tough for anyone because the defaults are certainly expected to rise.”
There are also implications for the regulator ASIC and in fact Coghlan is on the business advisory panel of the corporate regulator.
In its revised corporate plan, ASIC outlined concerns around the decline of registered liquidators, which means that the sector may lack the capacity to respond to a significant increase in insolvencies, should it occur.
“ASIC will mot likely need a special unit of insolvency practioners inside the regulator to do the tick and flick administration of those businesses.”
He also warned about the increase in phoenix activity – a challenge also flagged by ASIC in its plan.