The effectiveness of the moratoria: No noticeable increase in non-performing loans

In its latest Financial Stability Report, the Central Bank of Malta studied extensively the impact of the moratoria on credit facilities that it introduced in April 2020. By the end of August 2020, there were 9,818 households and firms that were benefitting from the moratoria for an amount totalling €1,927 million. This was equivalent to one sixth of total outstanding facilities extended by Maltese banks.

As at end December, the number of beneficiaries had fallen to 2,373 with the moratoria covering €749 million, or just one sixteenth of total outstanding facilities. By the end of April 2021, a year after the moratoria was launched, the number of beneficiaries had fallen to 750 with the moratoria covering €282 million, or one fortieth of total outstanding facilities. In January 2021, the Central Bank reactivated again the extension of the moratoria and allowed the submission of applications for new moratoria.

The Central Bank estimates that the net interest income of banks was reduced by between 1.4% to 10.4% of potential income earned from loans. This is one of the causes underpinning the drop registered in the profitability of banks.

One of the main fears some had on the expiry of the moratoria was that beneficiaries would not be able to start repaying their credit facilities. This because economic activity remains below its pre-pandemic levels, particularly those operating in the tourism sector.

The Central Bank’s study, on the other hand, reveals that this fear did not materialise. Out of the expired moratoria, the Bank estimates that just 0.5% of moratoria extended to households ended up as non-performing loans. In the accommodation and food services activities the proportion of non-performing loans was limited to just 1.5%. For the real estate sector, the proportion that has proven non-performing was 2.2%. For the remaining sectors, such as manufacturing, retail and construction, the proportion of non-performing loans was only 0.1%.

When expressed as a share of total loans under moratoria, non-performing loans amount to less than 5% of the respective category. To be precise the rate was of just 3.7%. This means that after providing these moratoria, banks are now receiving interest and repayments from over 96% of all loans. The proportion of non-performing loans out of the loans that benefited from the moratoria was in essence the same as that on all other loans.

The Central Bank concludes that “by avoiding an undue and potentially premature classification of certain distressed borrowers as non-performing, loan moratoria have alleviated pressures on banks’ capital”. This, together with other measures, supported banks’ ability to keep supporting the flow of credit to the economy.

Given a break from paying interest and capital repayments for some months, the bulk of affected households and firms were able to put their house in order. Once the moratoria period expired, they were able to resume with their commitments. Thus, in essence the moratoria ended up being a win-win. A win for households and firms who were not foreclosed or had to declare bankruptcy. A win for banks who did not have to increase their capital or lose valued customers.

With the economy recovering fast, and thanks to other measures such as the facilities offered by the Malta Development Bank, firms and households are well-positioned to resume their consumption and investment. Without the moratoria, most probably the recovery would not be able to gain traction as over one-sixth of indebted households and firms would today be facing bankruptcy or closure. Instead they are still valued bank customers ready to push the economy forward.

 

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