BREAKING NEWS: Hungary c.bank urges lenders to suspend loan repayment obligation for businesses
The MNB announced on Monday that it has taken several measures to support corporations that have found themselves in a difficult position or those that could be in the same boat due to the COVID-19 global pandemic.
the central bank is calling on commercial banks to adopt a repayment moratorium for corporations. should they refuse this plea, the mnb is asking the government to order the same moratorium on the repayment of corporate loans.
Under the aegis of the bank's efforts to mitigate the impacts of the novel coronavirus it has applied a repayment moratorium on loans issued under its Funding for Growth Scheme (FGS) and allows banks to restructure the FGS loans available for small and medium-sized enterprises and modify the terms of repayment. The moratorium will be in effect until 31 December 2020 and the MNB estimates that it could potentially effect 25,000 businesses.
In a bid to support lending to the corporate sector, the central bank has also decided to expand the scope of acceptable collateral by loans extended to large enterprises. It is to start consultation this week with commercial banks so that they would approve forint-deominated and FX loans extended to large corporations as collateral.
In local banks' balance sheets, there are nearly HUF 3.6 trillion worth of performing large corporate loans, on which the MNB applies a 30% haircut across the board. As a result of the measure, the value of collateral that may be used in the central bank's liquidity boosting operations will growth by more than HUF 2.5 trillion or 5% of GDP, in parallel with which the banks' lending potential will also increase substantially.
The loan repayment moratorium on corporate loans could help shore up the liquidity position of businesses, weather the temporary financial strains and accelerate recovery, the bank said.
It said that if the lenders would not pay heed to the recommendation, the MNB will request the cabinet to make sure they do by creating legislation. The repayment moratorium should remain in effect until the end of 2020, the MNB added.
The repayment moratorium on corporate loans could be a major lifeline for local businesses. COVID-19 could potentially lead to an unprecedented rise in corporate defaults and mass layoffs as businesses staying afloat would need to finance labour costs while their revenues contract. The moratorium could mean life or death for some businesses.
The key question is what would be an acceptable alternative for Hungarian banks now that they are looking at a steep rise in risk costs (lending losses). In one pan of the balance we have the write-downs on capital and interest. In the other pan we have interest income that will not be collected for over ten months, because in the case of the moratorium capital claims remain only they will be repaid later.
The stock of corporate loans reached HUF 8.3 trillion at the end of 2019, according to MNB data. Assuming that commercial banks realise an interest margin of 2% on average on this (the actual figure could be close to this one once we include loans extended under the FGS), the interest income loss accumulating in the over 10 months until year-end could reach some HUF 150 billion. The other scenario of bankruptcies this amount would translate into a risk cost of 1.8% of total loans, which would be reminiscent of the gravest crises (the acceptable maximum at most banks is about 0.5% in normal times).
The above estimates suggest that before today’s decision the central bank has made some calculations and came to the conclusion that we could be facing a major economic downturn and an exceptional jump in risk costs. Lawmakers and experts doing the risk assessment need to calculate carefully whether the expected loan losses (risk costs) of the banking sector and total social losses stemming from a potential inertia are proportionate to the loss of profit banks will suffer on the loss of interest income (that may be partly offset by the state with an appropriate tweaking of tax rules). For the sake of comparison: the combined profit of the banking sector was HUF 700 bn in Hungary last year, of which almost HUF 500 bn could have been realised in Hungary (data adjusted for the foreign subsidiaries of OTP Bank), i.e. the system would not be crippled by this moratorium. Its capital buffer would remain reassuringly high, but it would need to say goodbye to a great chunk of its profits.
Cover photo by MTI/Noémi Bruzák
