IMF Report Queries When Loan Deferral Decisions Will ‘Come Home to Roost’?
(24 August 2020 – Australia) Concerns are mounting over the A$275 billion in deferred business loans and mortgages Australians are carrying forward anxiously as a result of the COVID-19 pandemic.
Acknowledging the threat of rising unemployment, banks faced little difficulty accepting the need to ride out what was hoped as a short period of economic uncertainty. The impact of government stimulus measures such as JobKeeper and JobSeeker are now being assessed closely before enforcement action is taken against borrowers as banks cautiously encourage borrowers to consider returning from loan repayment holidays earlier than planned if their circumstances permit them.
A recent International Monetary Fund (IMF) study of the experience of Irish banks in the financial crisis, labelled the ‘Celtic Tiger’, found that keeping otherwise non-performing loans (NPL) alive led to a range of complications. The study found that banks with high levels of NPLs relative to their capital and provisions were more likely to grant forbearance measures to the riskiest group of borrowers, often referred to as ’zombie loans’ where concessions are made to enterprises facing an elevated risk of insolvency. Risky borrowers were also more likely to get an increase in the overall limit or the maturity of a loan from a distressed lender.
The key finding however was the fact that there was no forbearance measure which significantly reduced the probability of default in the long term. Importantly where banks prevented a default by granting concessions to troubled borrowers it was often a substitute for new lending, crimping overall credit growth.
The IMF found this could be economically useful under some circumstances, but could also be used by banks to conceal losses. This could lead to systemic risk by increasing uncertainty about the quality of banks’ assets and undermining trust in the banking sector’s solvency. While the report said it was too early to analyse the effectiveness of forbearance in the COVID-19 pandemic, the implementation of broad based measures to help companies through the liquidity shortage was justified.
“However, as disentangling illiquidity from insolvency becomes easier, our findings may help policymakers to shape a more targeted approach in later phases of the crisis” stated IMF Economist Katharina Bergant and Norges Bank Senior Economist Thore Kockerols in the ‘Forbearance Patterns in the Post-Crisis Period’ report.
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