BSP chief warns vs proposed 365-day debt moratorium

Published August 13, 2020, 10:00 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the proposed 365-day moratorium on loan payments could lead to bank runs and create a credit crunch which would not help an economy that is trying to recover from the impact of the COVID-19 health crisis.

 “While we recognize the noble intentions behind the adoption of a 365-day moratorium on loan payments, the said policy, while having the best interest of the public in mind, may result in unintended consequences that will severely affect the banking industry, the financial system, and the economy,” warned Diokno on Thursday.

The proposed 365-day moratorium on loan payments was included in the “Bayanihan 2” bill currently being deliberated in the Lower House. In the first Bayanihan Act, lending institutions such as banks were mandated to give borrowers a grace period of 30 days and this was extended while the strictest community quarantine status was in place.

A 30-day grace period is one thing, but Diokno said to expand it to a year-long hiatus will create financial industry problems. “It will significantly strain the liquidity and capital position of banks (and) the inability of a bank to service withdrawal may trigger a bank run and will undermine the confidence of the public in the banking system,” he said during his regular “GBED” online chat with the media.

Since banks’ fund sourcing will be affected, loan funding will also be limited. Diokno said a year-long ban on loan payments will “limit the availability of credit in the country as banks adopt stricter underwriting standards or completely deny credit to some sectors, including the micro, small, and medium enterprises.”

 “Adopting a 365- day moratorium on loan payments will pose serious risks to the soundness of banks and financial stability in general,” stressed Diokno. “A one-size-fits all prescription is unwise. While the Philippine banking industry is sound, some banks might end up standing, others may be adversely affected.”

Diokno has often reiterated all throughout the lockdown period that the domestic banking system is sound and resilient, but it is not insulated from all adverse impact of the health crisis.

 “A sound banking system is one of the aces in our sleeve. It is one of the reasons why the Philippines has received affirmation from credit rating agencies amid 82 sovereign downgrades and 104 outlook revisions from January 1 to June 30 this year,” he said, referring to S&P Global Ratings, Fitch Ratings and Moody’s Investor Service.

Diokno reminded the Lower House that the lessons learned from previous crises show that the real economy will suffer when there is financial instability. “A banking crisis, in particular will disrupt the flow of funds between savers and borrowers, impede efficient allocation of financial resources which ultimately affects economic growth and development. As you know, while monetary policy has done heavy lifting amid this public health crisis, it is not the only game in town.”

The BSP is currently conducting a comprehensive, baseline  survey of all banks and non-banks to assess how the pandemic has affected the financial sector. The data they will gather will review the financial and operational impact of the COVID-19 pandemic on banks, particularly on asset quality, liquidity position, profitability, capital position, as well as the impact of increased digital business.

Diokno has said that they need to assess the impact of the pandemic on their supervised banks and other financial institutions, and the BSP also needs to know the extent of relief of passed by banks to clients or customers.