Lenders urged to look for early signs of borrower distress

Despite the lack of traditional risk signals, lenders have been warned to watch out for early indications of distress among their business borrowers.

Following the termination of the “cash cushion” provided by Treasury-backed support schemes, the cash levels kept by firms have reverted to pre-crisis levels, according to the most current FXE Lending Monitor issued by Funding Xchange.

Funding Xchange cautioned that these lower bank balances might affect their capacity to withdraw money from their accounts.

According to Katrin Herrling, CEO of Funding Xchange, “The vast amounts of cash disbursed during the pandemic created a safety net with balances almost doubling overnight – masking temporarily other signs of distress,”

At a time when the economy is being harmed by rising interest rates, record oil prices, and a potential recession, cash levels have now returned to their pre-crisis levels.

Lenders must dynamically evaluate their portfolio and watch business trade performance in order to understand how their risk is changing even though arrears are still surprisingly low. This gives the foundation for proactive consumer engagement and shows how investors are protecting themselves.

According to Funding Xchange, the FXE Lending Monitor identified warning indicators of trouble that deviate from typical industry-driven downturn patterns. For instance, the monitor discovered that different companies in related industries have “widely varied trajectories,” which may indicate that other criteria, like as the calibre of the management team, may be more important than exposure to a particular industry.

Lenders were advised by Funding Xchange to be aware of the earliest indications of concern so that they might act quickly to prevent harm.

According to the firm, “how lenders are impacted” relies on the strength of their portfolios and their capacity to prevent defaults by approaching businesses early.

“FXE advises lenders to understand the trajectory of businesses’ performances to seize the opportunity to pro-active engage with businesses and adjust credit appetite and integrate a broader set of performance data in credit decisions to originate new credit with greater confidence.”