The debt moratorium
One of the pressing issues of the day is the plan of Congress to provide a two-month moratorium or grace period on loan payments. It was originally a one-year debt moratorium under the house version of the Bayanihan II. The time frame was criticized for its possible impact on the banking industry in terms of risk and liquidity.
A moratorium is intended to prevent the cash crunch induced by the enhanced community quarantine or lockdown. Revenue and customer starved companies shall be given enough time to pay back their debts. Small and medium enterprises are unlikely to have huge cash buffers and have little recourse but to defer loan payments. The moratorium reduces the burden on companies adversely affected by the business disruptions.
The devastating effect on the economy is clear as the country enters one of its worse GDP decline in decades. With the virus still to depart, the medium-term economic scars will be palpable. Resumption of ordinary life does not seem to be within easy reach and a 60-day moratorium may not be sufficient to build up cash to settle debts. The long quarantine has definitely disrupted trade and commerce. With the Philippine economy largely consumption led, the pandemic has altered the landscape that has defined the country’s growth.
Some say that 60 days will not be enough. On the other hand, the original 1 year proposal seems too oppressive. It is a delicate balancing act. Whatever final action is taken on the length of the moratorium, it is of course still speculative if the loans and interest obligations will be fully paid once it ends. The banking sector nonperforming assets as a share of total could rise by a big number. Banks will be under pressure to proactively augment capital soon. But weaker banks will find it difficult to attract investors’ interest unless the economy finds a way to rebound.
The moratorium is intended to help debt-exposed borrowers. But it also has an effect on the current lending activities of the banks. With growth prospects weak and uncertain, only the brave entrepreneurs will invest in new ideas, premises, machineries and ventures. Jack Ma was even quoted to say that the objective of businesses in 2020 is simply to survive. But for those willing to move forward, invest and borrow, will the risk averse banks be ready to respond?
In response to many financial crises in the past, regulations have been forcing banks to be more risk averse. In the past, many of banks held only a fraction of their assets as reserves and they borrowed short term to make long-term loans or hold long term securities. This exposed banks to runs and forced the hand of regulators to impose stricter rules.
National and international regulations such as the Basel framework have required banks to fund themselves with more capital and encouraged them to take less risk. Core capital in balance sheets have to be increased radically. The risk weights supervisors attach to bank assets which is a measure of how uncertain the underlying loans and securities are have become stringent. And this makes the assets stronger, albeit leading to bankers claiming that their balance sheet has become a scarce resource.