4 years ago

Moratorium, loan rescheduling and restructuring

Measures for recovery and resilience

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In Bangladesh, during the nationwide general holiday (shutdown) period, the businesses in various sectors were forced to temporarily pull down their shutters to stem the spread of the deadly virus. Following the recommendations of the government as well as the changing consumer behaviour, some sectors were even forced to stop their business altogether. Ready-made garment, the country's economic lifeline, has been hit hardest by the coronavirus with enormous numbers of cancelled orders due to disruptions to global supply chains amid worldwide shutdowns.

In response, the government has been taking swift action to support businesses to survive the pandemic and keep the wheels of the economy running, while protecting the jobs of the millions. The government has taken measures like  Tk 50bn (approx. USD595m) stimulus package for export-oriented industries at 2% interest; stimulus packages of Tk 677.5bn (approx. USD8bn) for increasing public expenditure, widening social safety net coverage and increasing monetary supply; and direct cash assistance of Tk 7.6bn (approx. USD91mn) for informal sector workers & health insurance. Besides, Bangladesh Bank declared a moratorium on loan payments until 30 September 2020. Despite the government acting quickly, many businesses still face the immediate risk of liquidation and millions of workers have already lost their jobs as companies reduce or freeze their operations and experience order cancellation. The uncertainty surrounding the duration of the pandemic and the decline in economic activity is likely to force many more firms to restructure to try to save their operations.

Now time is rife to ask whether the government-declared stimulus packages are being implemented properly to achieve the result that they are aimed at. Measuring the actual health of the economy is crucial to come up with pragmatic solutions for recovery and resilience. As the moratorium facility provided by Bangladesh Bank will come to an end on September 30, 2020, what will happen after September? Do all businesses have enough solvencies for payment of loans from October? Since the early June the general holidays have ended here. Businesses in almost all sectors have since resumed their operations, and the vast majority of the people have returned to work. With that, many borrowers who initially opted for/ took the moratorium have started to resume loan repayments. These solvent borrowers should continue to repay as it will reduce their overall debt and borrowing cost. Nonetheless, it is recognised that some are still facing income and cash flow challenges, especially those who have lost their jobs or experienced a salary cut/reduction in incomes. So, a targeted extension of the moratorium and repayment flexibility need to be provided to the borrowers still affected by COVID-19.

Earlier, the Bangladesh Bank (BB) declared a general moratorium for all. But, this time the extension of the moratorium facility should be targeted considering the present macroeconomic situation. A targeted approach will ensure both financial resources and attention are prioritised in the most needed sectors. Meanwhile countries around the world are also taking measures to extend the moratorium facility provided to the affected borrowers. In our neighbouring country India, Banks/FIs are allowed to extend the moratorium period up to 2 years as per the recent guidelines of the Reserve Bank of India (RBI). In Malaysia, upon expiry of the loan repayment moratorium by end of September 2020, banks will continue to offer targeted financial assistance in the form of restructuring and rescheduling (R&R) to borrowers who continue to face repayment issues. The State Bank of Pakistan (SBP) allowed all banks & finance companies to defer repayment of principal for consumer loans for one year that will provide a breathing space to the stressed borrowers till April 2021.

As the charging of interest continues during the moratorium, it's a temporary measure that provides only a payment holiday to the borrowers but ultimately leads to higher repayment amounts. So, the lenders' profitability remains intact while the borrowers may be burdened with large monthly instalment sizes after the end of the moratorium period. For this, there's also the risk of default loans to mount once the moratorium is withdrawn. To overcome this situation, banks should come up with Reschedule & Restructure (R&R) facilities for helping the affected borrowers. By extending the loan repayment schedule to a longer tenure or changing its terms on the basis of banker-customer relationship, loan R&R may reduce the monthly obligation. From the customers' perspective, this can help them ease their cash flow, allow continuity in their business and perhaps, avoid any legal action. From the bankers' perspective, the rescheduling or restructuring can help the banks reduce non-performing loans and lower the requirement of specific provision.

As the present banking sector has already been burdened with the non-performing assets and COVID-19 stresses are going to worsen it further, restructuring of the impacted loans is the only solution to keep the economy afloat and ultimately recover from the crisis. In this regard, the BB has to act immediately with new policy guidelines for banks/ FIs to navigate through the upcoming challenges. The risk is now unprecedented and the very specific policy responses from the central bank are the key to survival for both the lenders and borrowers. Banks/FIs should also internally develop tighter policy measures as well as craft very specific procedures for selecting the genuine borrowers who are in stress related to Covid-19 only. The arrangements whichever taken for facing the upcoming days, a sectoral assessment must be done to see which sectors of the economy have fallen prey to Covid-19 most. This time, it's much important to more critically look into the financial affairs of the borrowers than at any time before for proper selection of the borrowers in the greater interest of the banks/FIs.

Success in this pursuit of economic recovery can only be achieved through effective coordination among all the stakeholders of the economy. The bankers' role here is to deliver liquidity to the right hand at the right time. Banker's prime duty now is to disburse loans from stimulus packages to the eligible borrowers in a time befitting manner. Doing so along with providing the extended moratorium/rescheduling/restructuring facility whichever is going to be prescribed by the regulator in the coming days, will ultimately ease the existing cash crunch of the borrowers, and surely is going to help them get back on track. We hope recovery from the crisis and ultimate resilience can be achieved through these measures of moratorium, rescheduling and restructuring.

The writer is the Chief Financial Officer of Mercantile Bank Limited,
[email protected]

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