The Bangko Sentral ng Pilipinas (BSP) is not keen on granting another round of payment moratorium on loans as the banking system may not be able to absorb another round of moratorium on debt payments as banks need time to build up buffers while the economy – on the second year of the COVID-19 health crisis – is slowly reopening from the government-imposed lockdown.
This developed as Congress has proposed another economic stimulus package or Bayanihan 3. Although the two versions of Bayanihan 3 now pending at the Lower House did not mention of any debt moratorium, the previous two stimulus packages Bayanihan 1 and 2, which already expired, provided debt payment moratorium or suspension of debt payment on all loans during the pandemic year 2020.
“The potential impact of an extension of the debt moratorium needs to be methodically assessed based on a holistic analysis of the impact of the COVID-19 not only on the financial system but also on other sectors of the economy,” according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
“As the economy is starting to recover from the initial impact of the COVID-19, a blanket implementation of a mandatory grace period may need to be carefully evaluated,” said Diokno.
So far, the two versions of the proposed Bayanihan 3 both in the Lower House and Senate has made no mention of any extension of a no-penalty or grace period for unpaid loans for all borrowers -- households and corporate. It also did not discuss instituted moratoriums in paying loans, rents and utilities.
Instead, House Bill No. 8628, proposed by Rep. Lord Allan J. Velasco and Rep. Stella Luz A. Quimbo, included the creation of a Credit Mediation and Restructuring Service (CMRS) for micro, small and medium enterprises for a more favorable terms of credit and loan terms from banks and lending institutions.
Sen. Ralph G. Recto’s proposed Senate Bill No. 1953 which will provide P485 billion for economic recovery versus HB 8628’s P420 billion, is a counterpart measure for HB No. 8031 filed by Quimbo and also contained provisions for the CRMS.
Diokno said that while the banking system remains “liquid, solvent and profitable” even after two grace period extensions under Bayanihan 1 and another 60-day loan moratorium under Bayanihan 2 which expired end-December 2020, they may not be able to handle another period of debt payment suspensions.
“Loan collections comprise a substantial portion of banks’ funding source. A further delay in collections would affect banks’ ability to support the financing requirements of its clients, such as servicing deposit withdrawals, paying off liabilities and borrowings and extending loans to households and enterprises,” said Diokno.
The BSP has previously cautioned both houses of Congress against imposing a long grace period. The Bayanihan 2 had proposed a one-year loan moratorium before a final period of 60-day, one-time extension, was approved.
With an economy expected to bounce back beginning in the second quarter, a blanket mandatory grace period could pose bigger problems for banks and other lending institutions, particularly since not all banks have the same resiliency, capital and strong provisioning for losses.
“Banks are not similarly situated, and those with limited risk-bearing capacity may apply more stringent underwriting standards or completely deny credit to some sectors, including micro, small, and medium enterprises,” said Diokno. He added that even with the lapse of the Bayanihan 2, the BSP’s regulatory relief measures remain in place.
“These measures encourage BSFIs (BSP supervised financial institutions) to provide financial relief to their borrowers that are affected by the COVID-19, in the form of more flexible lending or restructuring arrangements,” he said. He further noted that this “targeted approach would allow both the bank and his/her client to agree on loan terms that would consider the bank’s financial capability and their client’s requirements; thereby, increasing likelihood of loan collection rather than loan default.”
The central bank is currently conducting a comprehensive review and assessment of when to reduce or scale back the size of liquidity and COVID-19 relief measures to avoid financial distress post-pandemic.
So far, the BSP had infused the financial system P2 trillion in liquidity, about 11 percent of gross domestic product. The biggest of the BSP liquidity support was in the government securities market, it has purchased an equivalent of 5.60 percent of GDP. Its next biggest support is in providing provisional advances to the National Government which was about three percent of GDP. The latter is an extraordinary BSP provision in the amount of a fresh P540 billion cash advance in January, on top of traditional monetary interventions and regulatory relief measures.