MAS eases rules on loan repayments: Will this affect our local banks?

Last week, the Monetary Authority of Singapore (MAS) and the financial industry released a raft of new measures aimed at relieving the financial burden for those struggling from the pandemic.

The main gist behind this latest set of measures is the extension of debt moratoriums.

Recall that back when the pandemic first began, MAS had already instituted two sets of relief measures to help individuals and businesses.

To ease cash flow crunches, MAS allowed for the deferment of repayment for commercial and industrial property loans, mortgage loans, renovation loans and motor vehicle loans.

These measures were supposed to last till 31 December 2020 and applicants did not need to show proof of Covid-19’s impact.

The worry back then was that the local banks may face a potential avalanche of bad loans as Covid-19 caused a whole range of businesses to fail.

By allowing a deferral for loan repayments, businesses and individuals could better manage their cash flows and avoid bankruptcy.

The three local banks, namely DBS Group Holdings Ltd, United Overseas Bank Limited and OCBC Ltd, were also called on by MAS to limit their dividend payments to conserve cash during this crisis.

With this new set of loan measures, how will the banks be affected?

1. Details of the measures

Known as the Extended Support Scheme, small and medium enterprises (SMEs) in Tiers 1 and 2 are allowed to defer up to 80 per cent of the principal repayments on their secured loans till June 30, 2021.

Tier 1 and 2 sectors include those that have been hard-hit by the pandemic, such as aviation, aerospace, tourism, land transport and conventions and exhibitions, to name a few.

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SMEs in other sectors can also apply for these loan moratoriums, but only up till March 31, 2021.

The difference between this set of measures and the previous ones is that businesses now need to show proof of Covid-19’s adverse impact before the moratoriums are granted.

For individuals, those with residential, commercial or industrial mortgage loans who are unable to service their loans may apply for reduced instalment payments.

These will be pegged at 60 per cent of their monthly repayments for up to a maximum of nine months till June 30, 2021.

The conditions to be fulfilled are that the individuals need to show proof that their income has fallen by 25 per cent or more, and that their mortgage loan repayments are not 90 days past due.

2. More breathing room for businesses and individuals

These comprehensive measures highlight just how badly businesses and individuals have been impacted by the pandemic.

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The previous rounds of support were not sufficient to ensure that loan repayments are kept up to date, and banks have reported pockets of financial stress from businesses that continue to suffer from the fallout from the pandemic.

By reducing the loan repayment amounts, the government is helping businesses to better cope with their cash flows while reducing the probability of more businesses going bust.

These moves will, in turn, benefit banks as they will need to maintain a lower provision for bad debts.

Individuals who have been given breathing room can also better keep up with their mortgage loan repayments, leaving banks less exposed to bad loans on their balance sheets.

3. Moratorium loan exposures

A recent brokerage report on the Singapore banks released by UOB Kay Hian highlighted the proportion of moratorium loans for each bank.

DBS has the lowest exposure to such loans, at just 4.8 per cent of its loan book.

This was followed by OCBC with 10.1 per cent and UOB with 15.1 per cent.

The main reason for this difference is because DBS lends more to larger corporations, while UOB specialises in SME lending.

The report also noted that moratoriums are only granted for loans with collateral backing, so that banks can at least recover part of the loan should it go bad (i.e. not a complete write-off).

Get smart: Lower risks for banks

Overall, the measures introduced by MAS should be viewed positively.

Although moratoriums signal that many SMEs in affected sectors are still suffering, the staggered timing for the moratoriums to expire also means that banks can better manage their loan books.

With more breathing room given, businesses can also hope for a swift recovery whereby they can operate at some fraction of their original capacity.

This will help to mitigate losses and keep the cash flowing to enable them to continue servicing their loans.

For sure, banks may still see a spike in non-performing loans in the next few quarters.

But with these new measures in place, the damage should be well-contained and not spiral out of the banks’ control.