Will banks continue to grant financing to companies with structural problems?
In the three quarters prior to the pandemic, the volume of new bank credit granted to companies and households grew, according to the Bank of Spain. This entity published on January 29 a report on the evolution of bank credit to the private sector, which indicates that this type of financing continued to grow after the start of the pandemic, between March and September 2020.
This increase was due to the companies’ demand for liquidity due to the sharp drop in their income, together with the improvement in supply conditions. This improvement was mainly due to the ICO guarantee programs and the expansion of the financing programs of the European Central Bank, such as the TLTROs .
Evolution of bank credit and moratoriums after the pandemic
Despite this growth, during the third quarter of 2020 a contraction of credit was observed due to the exhaustion of the stimulus capacity of public aid programs, the extension of which was approved at the end of 2020 .
Likewise, the negative evolution of the supply of credit to companies in the third quarter of 2020 indicates a possible weakening of the capacity of banks to finance the economic activity of the private sector, both companies and households.
On the other hand, the evolution of the current credit moratoriums has fallen in total volume according to data from the Bank of Spain. This decline has been determined by the impact of the legal moratoriums, which accounted for 70% of the total. It is also necessary to take into account the transfers between the types of moratoriums, that is, to identify how many legal moratoriums have become association moratoriums, or vice versa. According to the semi-annual report, half of the former became sectorial or individual.
Altogether, the combination of decays and moratorium transfers has led to the disappearance of 84% of the legal moratoriums granted in the first six months of the pandemic.
There will be more vigilance in the future granting of bank financing
Continuing with the data from the Bank of Spain, it is concluded that, given the negative evolution of the supply of bank credit, it is necessary to continue monitoring this variable in the coming quarters to confirm if this weakness in the supply is temporary or if its effect is consolidated .
Likewise, given the analysis of the evolution of credit defaults, it is also recommended that they be monitored over the next few months. Given the uncertainty of the evolution of economic activity, it is presumable that these measures will continue to be present for a certain time. In fact, the guidelines and guidelines established by the European Banking Authority or EBA in the application of moratoriums were recently reactivated .
The experience of these months shows that these programs are flexible and that they can be activated and withdrawn relatively quickly, at the same time that they should be used to moderate possible liquidity problems and, at the same time, preserve adequate repayment incentives.
In relation to this surveillance for the granting of bank credit to companies and households, the deputy governor of the Bank of Spain declared in a webinar organized by the World Bank on January 21, that the measures to support the economy should be maintained and insist to entities to dedicate more resources to risk analysis and management. In addition, he advocated maintaining the financing aid measures, underlining that the exceptional circumstances that determined the granting of extraordinary public aid continue to exist and the current environment remains uncertain.
However, as there will be companies that, unfortunately, cannot meet their payments, he recommended that financial institutions discriminate those cases in which a specific aid can solve a situation of difficulty, from others in which there are structural problems. Likewise, it is essential that entities anticipate the maturity of financing operations already granted and recognize the provisions that must be made.
Lastly, the BE deputy governor emphasized the need to transform the economy into a more sustainable model and, to this end, support investment with adequate financing management to achieve a change in the production model . Also, he urged to be ambitious with this objective, but without ceasing to be prudent and rational with the money that is destined to this transformation, even more so considering that a large part will be financed with European funds .
In short, it is necessary to continue supporting investment financing for companies with temporary liquidity problems but solvent and companies with solvency problems but with viable business models that do not have structural problems.