Targeted debt relief

The bicameral conference committee of Congress has done right in discarding a provision in the COVID-19 relief package called “Bayanihan 2” that was feared to bring more harm than good to the economy.

The House version of the bill originally wanted to extend assistance to all those in debt through a one-year blanket moratorium on all loan payments. This provision triggered immediate and broad opposition from both the administration and the private sector.

The Bangko Sentral ng Pilipinas (BSP), the regulator of the local financial sector, minced no words in saying that a 365-day moratorium on debt repayments for all borrowers would only worsen the country’s economic problems. BSP Governor Benjamin Diokno pointed out that such a policy, while having the best interests of the public in mind, would inflict unintended dire consequences on the economy.

Since banks rely largely on interest earnings from their lending operations, a stop to all debt payments will significantly strain their liquidity and capital position, said Diokno. They will then be unable to service withdrawals of depositors and trigger bank runs, making the public lose confidence in the entire banking system. Banks, in turn, will have no deposit funds to extend as loans to finance the operations of manufacturers and other corporate borrowers.

Finance Secretary Carlos Dominguez III, who heads the administration’s economic team, likewise argued that a one-year moratorium on loans would “negatively affect the financials of banks and other credit providers, which, in turn, will affect their ability to provide new loans to borrowers or pay interest to their depositors who vastly outnumber their debtors… Ultimately, the entire economy will disproportionately lose more than the gains borrowers will make.”

Dominguez’s counterproposal was that debt relief should be more specific, with more leniency given to small borrowers and consumers affected by the crisis, particularly those who lost their jobs such as workers in salons, gyms, and leisure and entertainment enterprises. There are also industries doing better than others and don’t need debt relief. Dominguez cited the sugar industry, which does not need it now because of the harvest season, as opposed to, for example, the automotive industry, which suffered a severe setback in terms of sales because of the quarantine measures since the middle of March this year.

Another point to note is that last May, the head of the Bankers Association of the Philippines (BAP) said that while banks braced for higher credit losses due to the pandemic, there was a big percentage of corporate borrowers who were not interested in availing themselves of the one-month grace period banks were mandated to offer. Lenders such as the Bank of the Philippine Islands and RCBC disclosed that a “very large” percentage of their borrowers had told them they would continue servicing their debts notwithstanding the quarantine restrictions, waiving the grace period that banks were required to follow under Republic Act No. 11469, or the Bayanihan to Heal As One Act (Bayanihan 1).

While the BAP recognized the need for a grace period during the enhanced community quarantine or even during the modified enhanced community quarantine period, it supported the Senate version of the “Bayanihan 2,” which sought to provide only a one-month grace period for debt repayments.

Last Friday, the bicameral committee set aside both the House and Senate proposals and adopted the compromise provision of a 60-day extension for loan payments. It’s a good step away from the sweeping one-year moratorium, though Dominguez’s pitch for a case-by-case basis for debt relief remains the better alternative. Some industries have been battered worse than others. And some sectors will recover faster than the others. Banks have a way of determining whether a borrower has the capacity to repay its obligations, and those which cannot. Most of them, in fact, have already increased their provisions for potential loans going sour in the coming months. They know that some clients will be unable to make it, or to meet the regular repayment schedule.

The prudent approach is where banks are allowed to negotiate with debtors on a case-by-case basis. A “one-size-fits-all” formula is not the answer. Let those with the capacity to repay their obligations pay. Let those who can’t pay be extended debt relief. This is the fair course of action to take to help those in debt, while ensuring that the banking system is kept safe and stable as well.