(13 July 2020 – Australia) Australian banks have committed to extending loan repayment relief beyond the rapidly approaching September ‘cliff’ for an additional four months to January 2021.
One in five small business bank loans (18 percent) worth A$56 billion have been temporarily frozen through Q2 2020 according to the Australian Prudential Regulation Authority (APRA). Loan serviceability concerns will continue to rise as the new January 2021 cliff approaches given customers will eventually need to service the increasing mountain of debt.
Australia’s major banks have approved A$266 billion worth of loan repayment deferrals in total, representing ten percent of all loans according to the APRA data. While mortgages make up the bulk of deferred loans by volume, deferrals were more common amongst businesses than home loans. Nearly one in five business loans had been frozen compared to one in ten mortgages. Most deferral requests were received in April before declining in volume through May. The banking support package was endorsed by APRA which would extended the banks further “regulatory relief”.
The unprecedented administrative burden has resulted in the Australian banking sector hiring 3,000 staff collectively just to implement the program with many other bank staff repurposed to support the initiative.
One in two of the 800,000 retail and business bank customers who deferred repayments on loans worth more than A$260 billion in total were expected to begin paying off their debt by September as restrictions are eased in all other states and territories across Australia. However Victoria’s COVID-19 outbreak is a critical setback in the nationwide economic recovery given the state represents over a quarter of economic output.
The new six-week Melbourne lockdown is set to trigger a fresh wave of loan deferral requests from SMEs who were in the process of tentatively restarting operations and resulted in a reassessment of the ‘JobKeeper’ and ‘JobSeeker’ welfare programs.
The new lockdown measures are estimated to cost Victoria's economy between A$1 – 2 billion per week, delay investment, exacerbate rising unemployment and business insolvencies. Despite New South Wales (NSW) closing its border with Victoria in the wake of the latest outbreak, authorities are also scrambling to prevent a new outbreak on the outskirts of Sydney from flaring out of control.
“Many firms being forced to close for a second time are likely to shut down the business for good. This is especially likely for less liquid small businesses. A higher rate of business closures will have long-lasting impacts on the economic recovery, increasing longer-term unemployment and reducing economic capacity once lockdown measures are again removed” analysts at Morgan Stanley wrote in client note. The US bank analysts’ expressed concerns that the return to lockdown measures significantly increased business outlook uncertainty.
“The nature and speed of the economic recovery remains highly uncertain. Uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans. The pandemic is also prompting many firms to reconsider their business models. As some businesses rehire workers as demand returns, others are restructuring their operations” stated RBA Governor Dr Philip Lowe Dr Lowe.
“The Australian economy is experiencing the biggest contraction since the 1930s and the RBA is committed to do what it can to support jobs, incomes and businesses to underpin the recovery” Dr Lowe added, “All industries and sectors, but particularly travel, tourism, hospitality and events, urgently need to know and understand the various objectives for COVID-19 control and the strategies that will be implemented to achieve them. This will allow businesses to take the actions necessary to survive the near term challenges and, hopefully, be in a position to prosper when things return to normal. Containing COVID-19 to certain small areas or zones and opening the domestic and, as soon as possible, international borders will be vital for the survival of many businesses, not just in travel. What really worries business is panic at clusters of infection and subsequent ham-fisted shutdowns or lockdowns as we have seen in Victoria. State and territory governments do not have clearly enunciated strategies to deal with the pandemic and their handling of the crisis has been ad hoc at best” stated Flight Centre CEO Graham ‘Skroo’ Turner.
“The new customer support package will be specifically targeted to getting people back on repayments while continuing to help those hardest hit. The new measures, including extending the length of loans, converting loans to interest only for a time and consolidating debt, would help customers avoid a cliff in September” commented Australian Banking Association CEO Anna Bligh.
“This new phase of support turns a cliff into manageable steps for Australians to get back on track and repaying their home loans and business loans. Customers with reduced incomes and ongoing fin¬ancial difficulty due to COVID-19 will be contacted as they approach the end of their six-month deferral period, to ensure that wherever possible they can return to repayments through a restructure or variation to their loan. If arrangements cannot be put in place by September, customers will be eligible for an extension of their deferral of up to four months” Ms Bligh added.
“The Melbourne shutdown is a national setback which will be devastating for Victoria and all Australians. It’s good to see restrictions have not exceeded the original lockdown measures but the challenge will be finding a better way of managing outbreaks because businesses cannot operate on a stop-start basis, which will sap confidence and cost jobs” said Business Council of Australia CEO Jennifer Westacott.
“The Melbourne lockdown will push some businesses to the wall. There were some that would have been saying, ‘maybe I don’t need a deferral’, and now, bang, six weeks. So they’ll be going to their bank looking to defer their repayments” commented Council of Small Business Organisations Australia CEO Peter Strong.