Lenders have been urged to look out for early signs of distress among their business borrowers, even as traditional risk signals remain muted.
According to the most recent FXE Lending Monitor, published by Funding Xchange, cash levels held by businesses have returned to pre-crisis levels, following the end of the ‘cash cushion’ offered by Treasury-backed support schemes.
These reduced bank balances could lead to a reduced ability to make payments from their accounts, Funding Xchange warned.
“The vast amounts of cash disbursed during the pandemic created a safety net with balances almost doubling overnight – masking temporarily other signs of distress,” said Katrin Herrling (pictured), chief executive of Funding Xchange.
“Cash levels are now back at the pre-crisis levels at a time when the economy is under stain from increasing interest rates, record energy prices and a looming recession.
“Lenders cannot be complacent while arrears remain surprisingly low but have to understand how their exposure is evolving by dynamically monitoring their portfolio and tracking trading performance of businesses. This provides the basis for proactively engaging with customers and demonstrating how funders are avoiding harm.”
The FXE Lending Monitor picked up on signs of distress which do not follow normal patterns of industry-led downturns, Funding Xchange noted. For instance, the monitor found that individual businesses in similar sectors have “widely different trajectories”, which could suggest that factors such as the quality of management team could matter more than exposure to a specific sector.
Funding Xchange told lenders to be aware of the earliest signs of distress so that they can take swift action to avoid harm.
“How lenders are impacted depends on the robustness of their portfolio and their ability to mitigate defaults by engaging with businesses early,” the company said.
“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.”
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