Periods of stress in retail lending, particularly in unsecured loans and microfinance, present significant challenges for the BFSI (Banking, Financial Services, and Insurance) sector. In such times, leaders must adopt a multi-pronged approach to safeguard operations and foster resilience. Here’s a detailed look at the strategic measures taken by banking leaders and lenders to navigate such scenarios.

Uncertainty of jobs in the BFSI sector

Economic downturns inevitably create job insecurity, making it critical for leaders to balance cost control with workforce management.

• Profitability, cash flow, and business continuity: During times of financial stress, ensuring profitability, maintaining cash flow, and safeguarding business continuity become top priorities for BFSI organisations.
• Cost control is critical: Leaders often prioritise cost-cutting measures, and unfortunately, employee-related expenses are among the first targets.
• Reducing employee cost through downsizing: Downsizing is frequently used to manage costs, but it requires a balanced approach to avoid long-term damage to the organisation's morale and capabilities.
• Rationalising non-performing employees: Stress periods present an opportunity to identify and streamline underperforming staff to improve overall efficiency.
• Addressing organisational imbalances: Leadership teams focus on correcting structural imbalances, such as addressing overstaffing in non-essential areas.
• Transferring employees: In many cases, internal transfers are a preferred strategy, as they help retain skilled talent while avoiding the need for layoffs.
• Opportunity to hire talent: While some companies focus on cost-cutting, others see downturns as a chance to acquire high-quality talent at competitive costs, as market uncertainties lower candidate expectations.

CXOs and leaders refocusing priorities

Leadership must pivot their focus during financial stress, transitioning from aggressive growth strategies to reinforcing the organisation's stability.

• Shifting focus from growth to stability: Growth plans often take a back seat as leaders concentrate on stabilising asset quality and reducing non-performing assets (NPAs).
• Recovery timeline: CEOs of leading microfinance institutions (MFIs) predict that market recovery may take place within the next two quarters, providing a window for recalibration.
• Collection efficiency as a priority: Strengthening collections becomes crucial, as it directly impacts liquidity and helps reduce stress on financial metrics.
• Demand for risk and audit talent: Control functions, such as risk management and auditing, gain prominence during downturns, leading to an increase in demand for skilled professionals in these areas.
• Regulatory oversight: Regulatory bodies tend to adopt a more proactive approach during crises to ensure market stability and mitigate risks.

Reimagining customer satisfaction in turbulent times

During periods of stress, competitive pressures increase as new entrants challenge traditional players, forcing leaders to refocus on customer-centric strategies.

• Customer-centric approach: Organisations must ensure that customers remain at the heart of their strategies, especially as market conditions tighten and expectations evolve.
• Digital transformation in customer experience: AI-driven digital platforms are redefining customer interactions, offering faster, more efficient service with minimal need for human intervention.

Leadership restructuring during periods of stress

Periods of financial stress can lead to changes at the top, with organisations seeking fresh leadership to navigate challenges and meet stakeholder expectations.

• Accountability during stress: Leadership in high-pressure verticals—such as business heads, chief risk officers (CROs), and collection heads—often face intense scrutiny.
• Opportunity to revamp leadership: Stress periods provide organisations with the chance to replace underperforming leaders with new, external talent who bring fresh perspectives.
• Shareholder awareness: Financial stress often catches shareholders off guard, prompting increased scrutiny of the leadership team’s decisions.
• Governance concerns in MFIs: In many MFIs, founders also act as CEOs, creating governance concerns that may lead to shareholder interventions or changes prompted by private equity (PE) funds.
• PE intervention: Private equity funds, particularly those with significant stakes, may step in to replace existing leaders with their appointees to ensure stronger management practices.

Strengthening risk, collection, and audit functions

Risk management, collections, and audit functions often become the backbone of organisational resilience during financial stress.

• Increased demand for control functions: Organisations typically ramp up investments in risk, collections, and audit functions to fortify their defences against ongoing challenges.
• Strengthening functions for the future: Rather than being reactive, companies are strengthening these functions to not only manage current risks but also prepare for future uncertainties.
  
  Case example: During the COVID-19 pandemic, a leading housing finance company restructured its collections vertical, resulting in multiple senior-level hires to reinforce its capabilities.

The need to retain employees on the bench during downturns

While downsizing may be a reality for some, retaining a bench workforce can offer long-term strategic advantages for companies with a forward-thinking approach.

• Building bench strength: Maintaining a bench workforce ensures immediate readiness when the market improves, minimising delays in hiring and training.
• Avoiding a negative image: A hire-and-fire approach can tarnish the organisation’s reputation, making future talent acquisition more difficult.
• Upskilling bench employees: Engaging bench employees in training and skill development during quieter periods ensures they can contribute effectively when demand surges.

New skills for BFSI employees in a digital-first era

To stay competitive, BFSI employees must continually upgrade their skill sets to align with evolving business models and technological advances.

• Emphasis on data analytics and digitisation: Proficiency in data analytics and digital tools has become essential for BFSI professionals to navigate the sector’s increasing reliance on technology.
• Leveraging fintech solutions: Partnerships with fintech firms have introduced advanced risk and collection processes that can significantly enhance operational efficiency.
• Staying updated with technological advances: Keeping pace with innovations from leading technology providers is key to maintaining competitiveness and operational efficiency.

Conclusion

Stress in retail lending tests the resilience and adaptability of banking institutions. By implementing these strategies—ranging from cost management and workforce adjustments to strengthening risk functions and embracing digital transformation—BFSI leaders can navigate challenging times and emerge stronger.