Banks Around The World Are Suspending Loan Repayments

Banks Around The World Are Suspending Loan Repayments As Coronavirus H

Banks around the world are suspending loan repayments as coronavirus hits borrowers Article below: Singapore The Monetary Authority of Singapore said individuals can apply to defer principal and interest repayment of residential property loans. With a global recession on the horizon as the coronavirus pandemic continues to ravage economies around the world, banks in various countries have scrambled to offer relief for those whose lives, jobs and businesses have been upended in the crisis. Homeowners with hefty mortgage repayments and borrowers who have taken large sums of bank loans to sustain their businesses risk falling into default as world economies take a sharp dive amid nation-wide lockdowns and a halt in most international travel.

Pre-empting a potential tide of defaults from affected borrowers, Singapore's central bank on Tuesday (March 31) offered loan relief for individuals and companies. Individuals can apply to their banks to defer both principal and interest repayment of residential property loans until Dec 31, the Monetary Authority of Singapore said. Small and medium-sized firms can defer principal payments on secured term loans also up to the end of the year. Singapore isn't the only country offering generous mortgage deferrals amid the coronavirus crisis. Here are some other nations whose banks have sprung into action Malaysia Malaysia's central bank last week said banking customers would be allowed to delay repaying their existing loans for six months from Wednesday.

The moratorium - part of Bank Negara's measures to help borrowers under strain due to the coronavirus outbreak - will automatically apply to all ringgit-denominated loans and financing not in arrears of more than 90 days, The Star reported. It will not apply to credit card balances. The central bank said banks should allow customers to convert their outstanding credit card balances into term loans of not more than three years. Following the announcement, several Malaysian banks said they would not be compounding interest for their customers during the six-month moratorium period. RHB Banking Group, Public Bank Bhd, Malayan Banking Bhd (Maybank), CIMB Bank Bhd, OCBC Bank (M) Bhd, HSBC Malaysia, AmBank Group, Affin Bank Bhd, United Overseas Bank (Malaysia) Bhd and Citi Malaysia were among those banks offering non-compounded interest for retail customers and small and medium-sized enterprises.

Thailand Banks in Thailand announced a coronavirus debt-relief package in early March, offering companies a year-long grace period to repay their loans. The package came in tandem with state relief measures, and the grace period on loan repayments applied to companies in the tourism sector, exporters, importers and retailers, the Nikkei Asian Review reported. Britain Several banks in Britain have offered repayment holidays on mortgages and loans in an effort to stem a potential tide of defaults from borrowers affected by the coronavirus crisis. Among those lenders were the Royal Bank of Scotland, Lloyds and TSB, the Guardian reported early last month. RBS Group, in which the British government has a majority stake, said it would grant a three-month break on mortgage and loan repayments for customers under strain due to the virus situation. It also offered to temporarily raise affected customers' credit card limits and scrap fees on credit card cash advances, among other measures. Italy Italy announced in early March it would suspend all mortgage repayments across the nation, as the country went under lockdown to contain the coronavirus outbreak. Italy's banking lobby group ABI said lenders would offer debt holidays to small firms and families, BBC reported. It's not the first time debt payments were halted in Italy. A similar relief measure was granted to some small businesses and households during the financial crisis. Italian banks own the biggest pile of non-performing loans - about 142 billion euros - among European Union countries, according to a Bloomberg report. The Italian banking association in February asked for a one-year suspension of rules that force them to identify past-due loans as being in "default" to free up more money for lending. United States As the coronavirus crisis worsens in the United States, the country's two mortgage giants Fannie Mae and Freddie Mac have instructed lenders to grant their customers more flexibility in either lowering or halting home loan repayments for up to 12 months. Their action effectively grants relief to half of all American home loans, according to a Fortune.com report last week. Other mortgage lenders across the country are expected to follow suit in the coming weeks and months. The Trump administration was also mulling a nation-wide plan to let homeowners affected by the virus situation delay their mortgage repayments, Bloomberg reported earlier last month. But the government would have to decide on a mechanism for borrowers to catch up with their postponed payments, as well as to determine how to advance money to mortgage servicers so that investors in mortgage-backed securities get their guaranteed payments. Canada Canada's six biggest banks last month said they would allow homeowners to delay their mortgage repayments for up to six months, as part of a coronavirus-relief plan. The lenders - Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank - also offered other debt relief measures including credit card repayment deferrals and extensions on mortgages' amortisation periods, the Financial Post reported. Borrowers were advised to reach out to their banks to apply for the deferrals. Borrowers in good standing who had been affected by the pandemic could apply at any time, with deferrals available for an indefinite period, Bloomberg reported. Under the plan, payments are skipped for a period of time, and accrued interest accrued is added to the mortgage's outstanding balance. The additional interest is incorporated into future monthly payments when they resume, or upon renewal at the end of the mortgage's term.

Paper For Above instruction

The suspension of loan repayments by banks worldwide, triggered by the COVID-19 pandemic, has profound implications for the risks faced by financial institutions. While these relief measures offer immediate respite to borrowers, they also introduce significant risk considerations that banks must manage carefully to maintain financial stability. This paper explores the impact of such strategies on bank risks, examines how banks monitor and screen borrowers to prevent moral hazard and adverse selection, and analyzes the unique characteristics of credit cards in the context of the traditional “four Cs” of credit evaluation.

Impacts of Loan Repayment Suspensions on Bank Risks

One immediate impact of deferral strategies is the increased credit risk, particularly the risk of default or delayed repayment, which may lead to higher non-performing assets (NPAs) on bank balance sheets. When borrowers are allowed to defer payments without strict immediate penalties, banks face the challenge of assessing the true creditworthiness of these borrowers during and after the deferment period. This can lead to a buildup of hidden risks, especially if economic conditions deteriorate further, impairing borrowers’ ability to repay once the deferral period ends (Drehmann et al., 2020).

Liquidity risk is also heightened, as banks might experience a mismatch between their assets and liabilities. While the immediate cash flow benefits are evident, the postponement of repayments means that banks might need larger reserves or capital buffers to absorb potential losses. Furthermore, if multiple borrowers defer payments simultaneously, banks’ liquidity positions could suffer, constraining their ability to extend new credit and impacting overall financial stability (Beck et al., 2021).

Another significant risk is the potential for moral hazard, where borrowers may overestimate their ability to repay or delay repayment intentionally, expecting that the bank or government will offer relief or that the economy will recover quickly. This behavior can lead to increased credit risk and reduce the incentives for borrowers to maintain financial discipline (Klein, 2020). Consequently, banks need robust risk management frameworks to evaluate the implicit risks that emerge from these temporary relief measures.

Monitoring and Screening to Prevent Moral Hazard and Adverse Selection

Banks can implement various strategies to monitor and screen borrowers effectively during loan deferral periods. The use of advanced credit scoring models incorporating additional data points, such as recent income streams, employment status, and economic outlook, enables banks to better assess borrower stability (Berger & Udell, 2006). Limitations on the size and duration of deferrals can be set based on each borrower’s credit history and financial capacity to reduce moral hazard risks (Laeven et al., 2020).

Regular monitoring of borrower accounts through automated alerts and portfolio surveillance allows banks to detect early signs of financial distress. Moreover, requiring borrowers to provide updated financial information periodically during the deferral period helps banks verify that relief is justified and that borrowers do not exploit the deferment for non-economic reasons (Gianfrate & Peri, 2020).

Collateral management also plays a crucial role. Ensuring collateral coverage remains sufficient and monitoring its value throughout the deferral period can safeguard bank interests (Krahnen & Unterberg, 2004). Additionally, strict covenants and contractual clauses requiring borrowers to notify banks of any adverse changes in their financial position can help banks preemptively manage risks associated with moral hazard and adverse selection.

Characteristics of Credit Cards in the Context of the Four Cs

The four Cs—capacity, character, collateral, and condition—are traditional pillars of credit evaluation, but credit cards exhibit unique characteristics that distinguish them within this framework. Firstly, capacity refers to a borrower’s ability to repay debt. Credit cards are revolving credit instruments with flexible repayment options, which makes assessing capacity more complex. Banks often rely on credit scoring systems and transaction histories for evaluation (Jiménez et al., 2014).

Character pertains to the borrower’s trustworthiness. The use of credit histories and past repayment behavior allows banks to gauge character effectively. For credit cards, timely payments and responsible usage are strong indicators of borrower reliability, especially in the context of the recent preferential treatment in some countries.

Collateral traditionally involves physical assets pledged to secure a loan. However, credit cards typically do not require collateral, making them unsecured forms of credit. This increases the importance of character and capacity assessments in establishing creditworthiness (Khandani & Kim, 2010).

Finally, condition refers to the broader economic and industry environment. Credit card lending is sensitive to economic downturns, as rising unemployment and reduced incomes can impair repayment ability. Yet, modern risk management models incorporate macroeconomic indicators to adjust credit limits and interest rates dynamically. The special treatment of credit cards during crises, such as deferred payments and increased credit limits, reflects authorities’ recognition of their role in consumer spending and economic stability (Liu et al., 2021).

Thus, the unique attributes of credit cards—being unsecured, revolving, and sensitive to economic conditions—make them a distinct asset class requiring specific risk assessment strategies, especially when they attract special treatment during crises.

Conclusion

In conclusion, the proactive measures adopted by banks globally in suspending or deferring loan repayments introduce new risk dimensions that require vigilant management. While these strategies mitigate immediate financial distress for borrowers, they simultaneously elevate credit, liquidity, and moral hazard risks for banks. To manage these effectively, banks must utilize comprehensive screening, continuous monitoring, and robust collateral management practices to prevent adverse outcomes. Furthermore, understanding the unique characteristics of credit cards within the traditional credit evaluation framework underscores the importance of tailored risk assessment approaches, particularly amid economic uncertainties and special treatments during crises.

References

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