- Banks face mounting provisions, which could end up biting their capital as businesses and households struggle to repay loans.
- EU states have offered some relief measures to businesses such as repayment holidays on loans or state guarantees on the loans.
- Banks have been criticised by firms for insisting on personal guarantees to issue government-backed emergency loans to business owners
- Business owners say that is not fair when the firms themselves are only seeking the loans because of emergency measures introduced by the government.
- Personal guarantees allow banks to lend more because it means they are more likely to get their money back.
Banks face mounting provisions as businesses and households struggle to repay loans due to the epidemic, reports Business Today.
Non-payment of loans
According to the European Union’s securities and banking watchdogs, banks in the European Union have the flexibility to avoid a huge rise in provisioning for non-payment of loans during the coronavirus outbreak.
Banks said they face mounting provisions, which could end up biting their capital as businesses and households struggle to repay loans because of the economic turmoil caused by the virus outbreak.
Relief from EU
EU states have offered some relief measures to businesses such as repayment holidays on loans or state guarantees on the loans.
But banks have been unsure whether payment holiday and other similar measures would technically constitute a failure to pay, triggering an increased provisioning as required under a global accounting rule known as IFRS 9.
Higher provisioning would eat into a bank’s capital.
The European Securities and Markets Authority (ESMA) said IFRS 9 includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures.
ESMA’s banking counterpart, the European Banking Authority (EBA) also sought to reassure lenders.
EBA said “The EBA calls for flexibility and pragmatism in the application of the prudential framework and clarifies that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status.”
Banks have been criticised by firms and MPs for insisting on personal guarantees to issue government-backed emergency loans to business owners, reports BBC.
The requirement loads most of the risk that the loan goes bad on the business owner, rather than the banks.
Meaning, the banks can go after the personal property of the owner of a firm if their business goes under and they cannot afford to pay off the debt.
Government’s package to protect businesses
The coronavirus business interruption loans (CBIL) are a key plank of the government’s package to protect businesses throughout the ongoing shutdown.
The British Business Bank, decided not to require lenders to secure personal guarantees as part of the loan programme. Instead, it told lenders they have discretion over the security they require.
According to UK Finance, formerly the British Bankers Association, the scheme should offer loans of up to £5m, where the government promises to cover 80% of losses if the money is not repaid.
But, it notes: “Lenders may require security for the facility.”
And that could allow banks to repossess the owner’s personal property as well as the assets of the business if the firm goes under.
Barclays has told customers they will be required to sign personal guarantees to access the government-supported emergency finance.
HSBC told it will require a form of personal guarantee for loans over £100,000.
Royal Bank of Scotland
Royal Bank of Scotland has confirmed it will offer business interruption loans without asking business owners for personal guarantees – proving that more generous terms can be offered.
Other banks under pressure
The other banks will now come under pressure from business customers to copy RBS.
Personal guarantees allow banks to lend more because it means they are more likely to get their money back.
But the use of personal guarantees shifts the risk from the bank and the government on to the business owner themselves.
Loan under government emergency measures
Business owners and MPs say that is not fair when the firms themselves are only seeking the loans because of emergency measures introduced by the government.
The SME Alliance, which represents small and medium sized enterprises and is led by business owner Andy Keats, said that while business owners were grateful for the recognition that most firms will need help to survive the crisis, “yet again, it is the banks and not businesses who will receive the funds to help SMEs”.
‘Business owners take all the risk’
It said banks were seeking security – property they can repossess if the loan is not repaid – for the entire value of the business interruption loans.
“We would appreciate some clarity because, as things stand, the proposed loans mean the banks have no risk, the government has a small risk and businesses and their officers have 100% risk,” said Mr Keats.
What is the reaction?
Confusion about CBIL schemes
The All-Party Parliamentary Group on Fair Business Banking tweeted: “There is confusion about [coronavirus business interruption loan schemes]. The Treasury must issue clear guidance on parameters and not allow security at ‘discretion of the lender’ to muddy the waters. Unprecedented times require emergency funding. Keep it simple, and no [personal guarantees].”
Understanding regarding personal guarantees
Kevin Hollinrake MP, a former business owner who chairs the group, said: “I asked the chief secretary to the Treasury [Steve Barclay] in the House of Commons – does the new scheme include personal guarantees and he said it was his understanding that it would not. Well it’s my understanding now that it will.
“It should not include [personal guarantees]. If it does, very few business owners are going to want to take it up. In normal business circumstances, you can’t expect banks to lend money without some sort of commitment. But these are unheralded times and unprecedented measures.”
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