Bankers and government in talks to brace for coronavirus fallout
Loan defaults by corporates and households expected to increase amid growing risk of sudden economic halt
As the country prepares for the economic onslaught brought about by the coronavirus, President Cyril Ramaphosa, the Reserve Bank, the Treasury and banking executives held a series of engagements at the weekend on the resilience of the financial system.
As the economic ramifications of the virus intensify it can be expected that loan defaults by corporates and households will increase, as the risk of a sudden stop to the economy grows and liquidity dries up amid a shift by companies of investments into cash.
The Reserve Bank, which last week slashed rates by 100 basis points for the first time in a decade, and announced additional liquidity measures, is contemplating more measures to ease the pressure in the system.
This is after growing concerns from banks and asset managers that stresses are building in various parts of the financial system, increasing the cost of lending and threatening a “freeze” particularly in the government bond market.
Among the new measures, it has been suggested that the Reserve Bank support a payment holiday for some categories of borrowers, by allowing banks to restructure loans, but without requiring them to classify these as “distressed”. Banks would thus not have to increase the amount of capital they hold, which is usually a requirement for loans restructuring.
The life of the Reserve Bank’s dedicated facility established to assist banks to adhere to the new liquidity coverage ratio under Basel III — the committed liquidity facility — could also be extended and its phasing out slowed down, in the light of the Covid-19 crisis. Through this facility banks are able to access liquidity at lower rates.
The bigger message that the banking industry and regulators conveyed was that the country’s financial systems are sound. It has the appropriate mechanisms and tools in place to navigate what will be a difficult period ahead, said Mike Brown, chair of the Banking Association SA (Basa), in an interview on Sunday.
“It is vital to point out that SA has a very strong and stable banking system that is recognised the world over,” said Brown. “For sure all financial systems are going to be facing challenges as a consequence of the economic slowdown but SA is in a good place to deal with these headwinds given the existing strengths of our financial system.”
Due to the operations of SA’s exchange rate control regime, rand liquidity cannot move out of the country and remains within SA’s financial system, Brown said.
“We have seen time and time again in periods of crisis the overall rand liquidity funding pool remains stable, which means there is enough for banks to fund themselves, which is an enormous strength in our system,” Brown said.
SA’s banks, regulators and the government have the appropriate mechanisms and tools in place to navigate this difficult period, he said, and the banks and regulators are in constant communication.
In response to the financial and economic spillover the virus has provoked, regulators globally have acted to shore up banking systems, such as making changes to the Basel liquidity ratios, Brown said.
“One should absolutely expect that that should take place in this sort of environment. The regulations are designed to allow them to do that. We will be no different,” he said.
Measures by trade, industry & competition minister Ebrahim Patel to exempt banks from provisions of the Competition Act are also in the pipeline and will come into force this week. The exemptions, similar to those gazetted for the health sector last week, will enable banks to discuss responses in a common forum and remove fears that one may gain a competitive advantage over the other.
Relief for small businesses could be effectively managed through the formal banking sector as many do have overdrafts and loans, Patel said.
Some local banks have already stepped in to ease the plight of their customers. On Sunday Standard Bank announced support to small businesses and students.
The bank has provided a three-month payment holiday to qualifying small businesses with no more than R20m annual turnover. Students with a bank loan will also receive three months’ relief at 0% interest.