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Kriya’s risk approach in uncertain times

Michael Hoare
March 22, 2023
min read
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Our Chief Risk Officer, Michael Hoare reflects on the current economic landscape from the Risk team perspective

Kriya's risk approach

After some unprecedented global-scale events the market has been shifting and businesses worldwide are feeling the impact. Read on to hear from our Chief Risk Officer, Michael Hoare on the current economic landscape from the Risk team perspective.

“The times, they are a-changin.” - Bob Dylan

I am not much of an audiophile, but that sentiment certainly seems relevant at the moment for both consumers and businesses.

At the macro level the last few years have seen considerable upheaval. The COVID-19 pandemic, inflation in developed economies, energy shortages, an armed conflict right on Europe’s border, three UK Prime Ministers in the space of 51 days. And more recently there’s been the fear of a banking collapse as headlines are flooded with emergency meetings, central banks offering credit lifelines and tumbling bank shares. These are just the obvious events that immediately come to mind close to home. However, the full impact will take time to materialise and there are many more factors specific to certain geographies or sectors, which have knock-on effects and exacerbate that list.

At the micro level, every consumer and business is experiencing their own unique environment caused by these events. Consumers likely care more about rising interest rates and their energy bills than they do about Prime Ministers. Some businesses are more exposed to energy price increases, while others are likely benefiting from the increased focus on renewables and energy saving schemes.

Uncertainty is word of the year

What is consistent among all groups is the concept of uncertainty. The period starting in roughly 2010/11 (once the financial crisis had abated) and ending in Q1 2020 (when the COVID pandemic really started driving change in the UK) will likely be looked upon by historians and economists as a wonderfully stable period compared to what followed. The stock market grew, inflation was modest, unemployment was falling, and interest rates were low and stable.

The last three years, and more, will be labelled anything but stable. Uncertainty is a challenge for consumers and businesses alike. For a business, particularly small and medium sized ones, uncertainty could be reliance on one banking partner, not knowing when they will be paid by their customers (a thinly veiled plug for Kriya’s Invoice Finance product), whether contracts they rely on will be renewed or if they can find the staff to do the work.

Insolvencies are on the rise

Monthly insolvency volumes for the last three years, sourced from Insolvencies were higher in 2022, off the back of a lull in previous years caused by the pandemic. The outlook for businesses in 2023 and beyond is also now more uncertain.

Kriya’s track record in supporting businesses through tougher times

Kriya has a superb track record in lending to businesses through its Invoice Finance product. In the last decade, we’ve lent over £3bn. Where businesses hit rocky times, our record on recovering balances has also been excellent, due to the security inherent in the product (the underlying invoices) and well-time recovery actions.  We’ve seen recovery rates in excess of 75% of defaulted balances throughout this period.

As we look forward into more uncertain times there are a number of actions we have already taken to ensure we are lending prudently. We’ve done a full audit of our portfolio to identify very recent risk trends and enhanced monitoring of SME cash balances through Open Banking. We’re diligent in management of facility limits, adjustments to our pricing and consideration of exposure to industries and sectors, which might be more susceptible to a downturn in the economy.

However, more uncertain times can also provide opportunities for some businesses to thrive and there will always be a need for funding. The larger lenders often pull back disproportionately when times get tough leaving SMEs with solid businesses in need of funding. Being nimbler than our competitors, we’re well positioned to continue to support strong businesses whilst delivering attractive risk-adjusted returns for our investors. The recent news about bank failures in the US and Europe is likely to accelerate this as caution increases and institutions look to position themselves as much safer in the eyes of their investors.

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