CAL says debt moratorium extension will not impact P&L of banks, NBFIs

Capital Alliance Ltd. (CAL) said yesterday that Monday’s announcement by the Central Bank (CBSL) to extend the debt moratorium to COVID-hit businesses and individuals by a further six months will not have an impact on the profit and loss account of banks and non-bank financial institutions. 

The CBSL move follows the dwindling debt repayment capacity of borrowers in light of the COVID-19 second wave.

At the end of the moratorium period, the capital due coupled with the accrued interest incurred during the moratorium period will be converted into a new loan (going up to two years in tenor). They would be allowed to charge a maximum interest rate of a one-year Treasury bill yield + 1% if it were a licensed bank, and one-year Treasury bill yield + 5.5% if it were a non-bank finance company.

“Compared to the previous moratorium which ended in September, no concessionary interest rate needs to be charged during the moratorium tenor unless otherwise the bank voluntarily wants to do so. Hence, there will be no profit and loss impact on the banks,” CAL said in a research flash note. 

It said under the previous six-month moratorium, Equal Monthly Instalment loans (EMI) were only allowed to charge a maximum rate of 7% during the moratorium tenor, which resulted in banks recognising a one-off loss on interest rate differentials during 2Q 2020.

“Given the prevailing excess liquidity in the banking sector (some banks evening running above 40%+) and subdued loan book growth, the extended moratorium would have minimal impact on the banking sector liquidity or margins,” CAL said. 

With the excess liquidity currently being parked in government securities, utilising the excess liquidity at a one-year Treasury bill yield + 1% premium on the converted loan at the end of the moratorium period will have minimal impact to the banks’ profit and loss, it said. 

“This will also give the banks the breathing space to see how economic conditions unravel post-containment of the second wave spread, lockdown relaxation and vaccine developments before providing for loan losses (impairments) which are difficult to gauge in the present context,” CAL added.