Payday and Installment Lending Market – Perspectives and Main Problems For Its Rapid Development
Given the role and importance of the payday lending market of the US economy, there is a need to create additional incentives for the development of microfinance institutions in any US state either MA or GA.
Many US states are currently betting on the development of small business, which is explained by its high degree of adaptation to changes in external conditions during the crisis and its ability to respond as quickly as possible to changes in consumer demand. One of the most effective mechanisms for supporting small businesses is microfinance, which necessitates the implementation of additional measures to create favorable conditions for its development.
Positive aspects of the microfinance market offering payday loans
Firstly, the number of organizations issuing payday loans in MA is increasing.
Secondly, there is a high growth rate of small loans lent by various types of organizations. In 2021, the total loan portfolio of the payday lending sector increased by more than 66% and reached the level of thousand of dollars. The growth rate of short-term loans from commercial banks amounted to about 60%, credit unions — about 80%, and payday lenders – 90%.
Thirdly, there is a steady trend of growth in the share of non-bank credit organizations in the total volume of payday loans in MA: at the end of 2018, this indicator was about 37%, while in 2016 non-bank credit organizations accounted for about 20% of the total volume of small loans.
It is also necessary to note the stable ratio of capital and loans of non-bank credit organizations, which allows us to realize the adequacy of the capital base and the stability of these organizations.
Separately, financial experts can focus on the ratio of attracted deposits and loans issued, which characterizes the degree of financial intermediation. For credit unions, this indicator is at the level of 82%, which indicates the effective implementation of the financial intermediation function by credit unions.
The main problems of microfinance (payday/installment) market development
The decline in the level of welfare of the population will have a significant deterrent effect on the microfinance sector in the event of a prolonged recession in the economy caused by falling oil prices and the risks of greater crisis.
The growth of the payday loans MA segment is likely to slow down in the next 5 months amid regulatory restrictions and the need for market participants to restructure their business models.
The segment of medium-term consumer loans known as installments loans, on the contrary, may accelerate the growth of portfolios due to the absence of serious regulatory restrictions, as well as because payday lending services have incentives to refocus on installment loans and continue operating in a new format.
The prudential standards established for microfinance organizations (MFIs) remain quite soft — many of them do not have a significant impact on the activities of the sector.
The profitability of the installment loan segment is more resistant to unforeseen shocks. However, the risks associated with possible insufficient coverage of payday loan portfolios with reserves will continue to put pressure on capital, especially given the relatively high leverage of the segment.
Significant concentration and lack of stable funding sources may continue to create refinancing risks. Funding of companies is carried out mainly at the expense of a limited number of legal entities and individuals.
These data indicate the stability and dynamic growth of the microfinance sector in the USA and Massachusetts, respectively, higher growth rates of lending to non-bank credit organizations, the gradual growth of the role of these organizations in the microfinance market and the presence of significant potential for its further expansion.
Keep in mind that in the period of post-crisis development, the role of the microfinance sector as a tool to support and stimulate the development of small business and private entrepreneurship, the introduction of innovations in small business will increase, which requires further expansion of the activities of organizations issuing payday loans and increasing the level of accessibility of financial services for the general population. This, in turn, determines the need to form an adequate resource base, which will allow increasing the volume of payday lending services in accordance with the existing demand.
Tags: finance, installment loans, market, payday loans