COVID-19: Moodys says loan moratorium may lead to greater build-up of credit losses for banks

The loan moratorium extended by banking regulators in countries like India and China to deal with the liquidity crunch amid COVID-19 crisis will provide temporary relief to borrowers, but will constrain banks from taking proactive recovery actions and could lead to an even greater build-up of credit losses once the moratoriums are lifted, according to Moodys.

In a report on Asia Pacific region, Moodys on Tuesday (April 21) said while policy stimulus will shore up credit quality for larger companies in sectors, including airline and oil and gas, Asia’s banking sector profitability will also decline from deteriorating asset quality and lower net interest margins.

“Financial regulators in China, Australia, Malaysia, India and some other Asian economies have enacted debt moratoriums to soften the liquidity crunch for businesses and households. While repayment delays will provide temporary relief to borrowers, these directives will also constrain banks abilities to take proactive restructuring and recovery actions. These measures also could lead to an even greater build-up of credit losses once the moratoriums are lifted,” Moodys said.

Moodys Investors Service further said this risk will increase substantially if the economic downturn, and measures to contain the spread of the coronavirus, persist for longer than expected.

“In the event of heightened banking sector distress, Asian governments will likely stand behind larger, systemically important banks. We view government support as stable in most of the banking systems that we monitor, reflecting our expectation of extraordinary support, should it be required, to avert financial contagion,” it added.

To give relief to borrowers hit by COVID-19 lockdown, the Reserve Bank of India (RBI) last month announced that EMI payments for all term loans, including retail and crop loans and working capital payments, will have the benefit of three-month moratorium.

Stating that Asia’s banking systems will face a much more difficult landscape, Moodys said weaker economic prospects and widespread financial market upheaval will translate into a more adverse credit landscape over the coming quarters.

“While the regions banks generally have adequate capital and liquidity buffers to weather the crisis, reduced business activity, lower (or more volatile) asset prices and higher unemployment will weigh on debt affordability and loan repayment. Banking sector profitability will also decline because of higher loan-loss provisions from deteriorating asset quality, lower net interest margins due to lower policy rates, and lower fee income on subdued business activity,” said Moodys, which has a negative outlook on 16 banking systems in the Asia Pacific region.

Moodys said although Asia’s external and fiscal buffers are generally more robust than those in other regions, equipping most Asian governments with more policy space, their policy responses to date will only cushion some of the impacts and not fully offset the economic and credit damage.

Widespread containment measures are crippling domestic consumption and production, which is spilling over to other parts of the region in the form of lower demand for commodities, imported goods and services, and supply chain disruptions, Moodys Assistant Vice President Deborah Tan said.

The coronavirus is exposing vulnerabilities in existing systems and we expect policy space to be constrained for economies with existing fiscal challenges or elevated external vulnerabilities, she added.