How measuring the ‘Pivot Factor’ can fill Credit Risk assessment gap post COVID

These are unprecedented times for lenders. Customer cashflows are depleted and loan track can’t be ascertained due to moratorium, making it increasingly difficult to decipher customer’s intentions. Existing templates of credit appraisal and scoring models using past data and financials may be inadequate. How, then, does a lender evaluate a customer?

‘Pivot’ may be our new tool.

While ‘intention to pay’ may be the tricky piece to assess in these times, ‘intention to survive’ isn’t. There is an increasing trend of companies trying to improvise, innovate and pivot. From a lender’s perspective, this may be the best indication of how a business weathers economic troughs to ensure long-term sustenance.

Nimbleness and creativity in maximising use of existing resources, are just the core competencies a business needs. Our rigid and old school assessment based on borrower’s specialisation of limited products may have to give more room for possible ‘diversifications’ or pivots that can help the cash flow coming in.

Interestingly, many businesses were quick to start thinking outside the box of existing product, process, and services. The challenge thrown by the pandemic was just push they needed.

There are fine-dine restaurants moving to complete home delivery models, many in plastics were manufacturing face shields and safety glasses and even the household items players have started venturing into personal medical diagnostic devices. Many in garments are manufacturing masks and PPEs while those in industrial chemicals have diversified into consumer sanitation products (sanitisers, hand washes disinfectants).

The anecdotes of how even the smallest vendors or shopkeepers are adding new products, accepting digital payments or simply changing delivery methods, are an encouraging sign.  For many business the extent of change is very significant say moving from one product category to another, while for others form factor, payment and collection methods or delivery channels have changed. However, the common thread is improvisation to ensure they survive.

While the materiality of improvisation and pivoting will depend on their scale of business and overall impact of pandemic, one thing is clear– Pivot they must!

If you are evaluating credit risk, it may be erroneous to keep relying on the past performance of existing product lines of the customer. Instead, asking these 6 questions may help get a better perspective while assessing a loan, in what may be called as measuring the ‘Pivot Factor’

1. How has the business changed its business and operating model?

2. How swiftly (both in terms of time period and extent of capex required) has the business undertaken these changes?

3. How material is the impact of such pivots on the cash flow (in short, mid and long term)?

4. Has the change led to new products, services or significant process changes?

5. What new customer segments is the business now able to reach?

6. Is the pivot/improvisation sustainable in long term (BAU scenario) ?

A caveat though– the changes a company undertakes may or may not fully compensate the demand loss in short-term. Nevertheless, improvisation and proactivity are very strong indicators of management’s ability to respond under extreme adversity.

In short, creativity and nimbleness may just be the new credit risk filters we may use to distinguish wheat from chaff!