Loan payment holidays and other options for dealing with clients in difficulties

The Czech Banking Association (CBA), which integrates most banks operating on the Czech market, has issued its statement on the coronavirus pandemic. According to this statement, the banks fully support their clients and are ready to implement measures to help clients affected by the economic consequences of the coronavirus pandemic.

The Presidium of CBA recommended their member banks to consider, in justified cases, a three-month loan payment holidays applied to mortgage and consumer loans. The banks will, in the first place, take care of clients who are employed and those who work as sole proprietors. These measures should also be extended to cover SMEs (please see ČBA for more details).

The approach presented by the CBA has also been supported by the Czech National Bank (please see ČNB for more details). According to the CNB´s statement in cases where a client's loss of income is only temporary due to the coronavirus infection, or the related preventive measures, the postponement of instalments is an appropriate way to ensure the repayment of the entire receivable in the future. Such a postponement may not lead to reclassifying an exposure as a classified, or non-performing, receivable under the applicable rules.

The banks, based on information presented on their websites, have already started collecting clients' requests for a three-month postponement of instalments following the CBA's recommendation.

Obviously, the banks will need to carefully assess clients' requests, in particular from the following angles:

1. Is the client's financial situation really affected by coronavirus infection and related preventive measures, or are there any other reasons?
2. Is the client's financial situation only temporarily adversely affected and is it still likely that the client will meet his or her obligations?

Although banks are, in general, used to dealing with similar situations (of course not when it comes to coronavirus), it is clear that it will not be at all easy to find answers to these two questions and it may require considerable staffing resources.

As for the first question, it can be reasonably assumed that banks, using the results of regular monitoring and long-term knowledge about their clients, will be able to answer this question with the appropriate confidence. Of course, there might be cases where, for example, due to the simultaneous effects of the coronavirus infection and other idiosyncratic shock events, the true reasons for a deteriorated financial situation will be less clear.

However, it seems to be much more challenging to find an answer to the second question since it means raising additional questions and, above all, finding answers that have so far shown a high degree of uncertainty, such as:

• How will the client and his family cope with the situation?
• Will the client incur additional costs to be covered from his or her budget?
• Will the client be able to benefit from government support programs?
• When will the society be able to tame coronavirus?
• How will the industry in which the client works or does its business develop in the short as well as long run?
• How will the respective industry evolve in the place where the client works or does business?
• How will the crisis affect clients' business partners?
• Did the crisis have a positive or negative impact on the client's reputation?
• Are there any new opportunities for the client?

 

It is also clear that the postponement of instalments is only one of the options to help clients. Other options may include:

• Reduction of regular loan repayments and postponement of the due date,
• Supporting good clients by providing them an additional loan or guarantee.

 

In addition to these options, however, it is necessary to consider possible termination of business relationship with some clients in order to minimize losses.

On 25 March 2020, the EBA published its statement on the application of prudential rules in the light of measures taken in relation to coronavirus (EBA Statement on COVID-19 measures).

The EBA has expressed its support for measures taken to address the adverse economic effects of coronavirus in the form of public and private moratoria that suspend loan repayments. According to the EBA, these measures do not mean that borrowers should be automatically put into default due to the fact that the 90-day default threshold has been breached.

Although the EBA statement is relatively long (4 pages), ARM is of the view that the opinion of the EBA is summarized in the following paragraph. You can find this paragraph on page 2 of the EBA statement (we quote the EBA statement literally):

“In the case of public and private moratoria permitting suspension or delays in payments, this impacts the 90 days past due criterion, as the delays are counted based on the modified schedule of payments. While institutions are still obliged to assess the obligor’s unlikeliness to pay on a case-by-case basis, this assessment refers to the modified schedule of payments, and where there are no concerns in that regard the exposure may remain in performing status.”

The ECB issued its press releases on the coronavirus related measures on 12 and 20 March 2020. However, as regards the postponement of installments, the ECB's statement is only general without further details.

26-3-2020