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The India Meteorological Department's (IMD) heatwave warnings have prompted significant concerns within the Indian financial sector, specifically among banks, non-banking financial companies (NBFCs), and payment processing entities. These institutions are bracing for a midsummer period fraught with operational challenges and potential financial setbacks, as the predicted extreme temperatures are expected to disrupt established business processes and negatively impact key performance indicators. The primary anticipated consequence is a noticeable decline in loan collection efficiency, with projections indicating a drop exceeding one percentage point. This decrease stems from several factors directly linked to the heatwave conditions, including reduced activity from field-based sales teams, logistical difficulties in reaching customers for payment reminders and collections, and a general slowdown in economic activity within affected regions. The oppressive heat is expected to limit the ability of collection agents to conduct their daily visits effectively, and some borrowers may request payment postponements due to business disruptions caused by the extreme weather. The projected decline in loan disbursals and new customer acquisitions further compounds the challenges faced by lenders. Sales teams are expected to be less active in the field due to the heat, leading to fewer opportunities for generating new business. Moreover, potential customers may be hesitant to engage in financial transactions during periods of extreme weather, contributing to a slowdown in overall market activity. To mitigate these adverse effects, lenders are actively adopting strategies focused on digitalization and risk management. A key element of this response involves the increased utilization of digital tools for both collections and sales. By leveraging online platforms, mobile applications, and automated payment systems, lenders aim to reduce their reliance on physical interactions and maintain operational efficiency despite the limitations imposed by the heatwave. This shift towards digitalization enables them to reach a wider customer base remotely, facilitate online transactions, and provide convenient payment options that minimize the need for physical travel during peak heat hours. Furthermore, lenders are implementing stricter underwriting standards for industries considered to be particularly vulnerable to the impacts of heatwaves. Sectors such as agriculture, construction, and transportation, which rely heavily on outdoor labor and are susceptible to weather-related disruptions, are likely to face more stringent credit assessments. By tightening their underwriting policies, lenders aim to minimize their exposure to high-risk loans and maintain the overall quality of their loan portfolios.
Manish Kothari, president and head of commercial banking at Kotak Mahindra Bank, emphasized the growing concern over climatic conditions and their impact on financial operations. He highlighted the increasing need for agility in adjusting underwriting policies and preparing for collections in response to evolving weather patterns. Kotak Mahindra Bank has enhanced its data analytics capabilities to better identify early trends and make risk-based underwriting decisions, recognizing that certain customer cohorts will be more affected than others by the heatwave. This proactive approach allows the bank to quickly pivot its business strategy and address the specific challenges posed by these shifts. The India Meteorological Department's data underscores the severity of the situation, with January 2024 being the third warmest in the past 125 years. The all-India mean temperature was 0.94°C higher than the historical average of 18.04°C since 1901, indicating a significant warming trend. The impact of previous heatwaves on loan collections serves as a stark reminder of the potential financial consequences. During last year's heatwave, extreme temperatures across the country led to a significant decline in loan collections, with lenders experiencing a drop of 50 to 200 basis points in collection efficiency during the second quarter of the current financial year. This decline translated into substantial revenue losses and increased operational costs for lenders. Moreover, the human cost of heatwaves cannot be ignored. Last year's extreme temperatures claimed the lives of nearly 100 people, primarily from heat strokes, highlighting the urgent need for effective mitigation measures. The worst-hit areas included parts of North India, such as Delhi, Uttar Pradesh, Rajasthan, and Bihar, underscoring the regional disparities in vulnerability to heatwaves. The anticipation of a similar decline in loan collections this year has prompted lenders to proactively implement strategies to mitigate the impact. Non-bank lenders, in particular, expect loan collections to fall by approximately 2%, mirroring the trend observed during the previous year's heatwave. This projected decline is attributed to reduced daily visits by collection agents and potential requests for payment postponements from customers facing business slowdowns. However, lenders remain optimistic that the situation will improve once the heat subsides.
The geographical extent of the heatwave's impact is also a major concern. In 2024, several cities saw temperatures exceeding 50°C, with heatwave conditions affecting regions including Haryana, Chandigarh, Delhi, Punjab, Uttar Pradesh, Madhya Pradesh, Rajasthan, Vidarbha, Chhattisgarh, Odisha, Himachal Pradesh, Jharkhand, and coastal Andhra Pradesh. This widespread impact necessitates a comprehensive and coordinated response from lenders operating across these regions. The strategies being adopted by lenders to combat the heatwave's impact encompass a range of measures aimed at enhancing operational resilience and minimizing financial losses. One key aspect is the implementation of flexible work arrangements for employees, particularly those involved in field operations. This includes allowing collection agents to adjust their working hours to avoid peak heat periods, providing them with access to cooling facilities and hydration resources, and offering remote work options where feasible. Lenders are also focusing on improving customer communication and support. This involves proactively reaching out to borrowers to provide information about payment options, offer assistance with financial planning, and address any concerns they may have regarding the impact of the heatwave on their businesses. By fostering open communication and providing tailored support, lenders aim to strengthen customer relationships and minimize the likelihood of defaults. Furthermore, lenders are actively collaborating with government agencies and local communities to promote awareness about heatwave safety and provide resources to vulnerable populations. This includes participating in public awareness campaigns, supporting the establishment of heat relief centers, and providing financial assistance to communities affected by the extreme weather. The long-term implications of climate change on the Indian financial sector are becoming increasingly evident. As heatwaves become more frequent and intense, lenders will need to adapt their business models and risk management practices to address the evolving challenges. This includes investing in climate-resilient infrastructure, developing innovative financial products to support sustainable development, and integrating climate risk assessments into their lending decisions. The ongoing heatwave serves as a critical reminder of the importance of proactive planning and adaptation in the face of climate change. By embracing digitalization, strengthening risk management practices, and fostering collaboration with stakeholders, Indian lenders can navigate the current challenges and build a more resilient and sustainable financial system.
Source: Lenders brace for a midsummer's nightmare as IMD flags heatwaves