Has the coronavirus ended a long period in which the public could easily borrow money for any purpose? Will financial institutions change direction, close the spigot, and create a credit crunch in Israel?
Tens of thousands of employees in Israel are losing their jobs or being sent on compulsory unpaid leave. Many small business owners and self-employed people are losing their livelihoods. At the same time, many people are suddenly finding themselves in cash flow difficulties requiring them to come up with cash from their savings, or by simply taking a loan.
This situation is generating demand pressure on financial institutions, headed by the banks, which are entering the coronavirus crisis after years of profits and reinforcement of their financial strength and stability. Meanwhile, non-bank players have sprung up in recent years, lending money to all comers and growing rapidly. It appears that they, too, are facing their first test, for which they appear to be as unprepared as the (much larger) banks.
In addition to demand pressure for new loans in order to get through a time of unknown duration with no income, the banks and non-bank credit companies are finding themselves with existing customers, whose numbers are increasing daily and who will continue multiplying if the crisis persists, who are having trouble repaying their loans.
All of these phenomena are liable to result in a steep rise in problem debt, which will have a negative impact on the banks' results in 2020. Many borrowers will experience difficulties, and will become non-paying debtors. Many more people will have to borrow in order to feed themselves, following the waves of layoffs and involuntary unpaid vacations.
"Even 'good' customers are getting into trouble and need loans"
In recent days, Governor of the Bank of Israel Prof. Amir Yaron and outgoing Supervisor of Banks Dr. Hedva Ber have announced a series of measures designed to remove some of the restrictions applying to the banking system in order to make it easier for the banks to grant loans to the general public, so that it will be able to survive the shutdown of the economy. Together with the real relief resulting from these measures, which should increase the supply of short-term bank credit, it appears that there is an ominous cloud looming that will become darker as the crisis lengthens and the shutdown becomes wider and deeper.
Actually, the central bank's measures make it look as though there is real concern about the possibility of a credit crunch. "Any minute, there will be tens of thousands of unemployed, and this will have an immediate heavy effect on consumption - something that is already happening, with small businesses losing their revenue capability," a banking system source said today, adding, "The most important thing for the economy now is credit. When the banks feel confident, they increase credit, but the banks definitely increase credit when there is an asset that can be attached. This is not a solution for everyone, however, at a time when even 'good' customers are getting into trouble and are in need of loans."
According to a number of market sources, the banks are still granting credit as usual, with a slight slowdown in providing mortgages in recent days, mainly because of the halt in activity in the economy, not because of a general decision. At the same time, in the non-bank credit market, which is much less sound, there is already movement. Direct Finance halted its marketing of loans for any purpose yesterday (it is continuing to grant loans for purchasing vehicles), following negative developments in in other non-bank lenders.
In any case, the question of whether there will be a credit crunch depends solely on the banks, which provide the vast majority of the credit to the general public and small businesses in Israel. Another source in the banking system explained to us today, "A credit crunch is not the right term. The question is whether the banking system is able to provide the necessary support for all of the economy's customers at the present time. This is a little different.
"The bank's instinct is to cut down at such times. If a customer in a bad situation is involved, he won't be given credit, and we'll also want a return - after all, this is the banks' responsibility to themselves, their depositors, and their investors. On the other hand, halting credit will eventually harm the customers, lead to a recession, and thereby harm the banks themselves. In other words, taking a long-term view, stopping credit now will do more damage to the customer. The banks therefore have to provide a solution and assistance to customers outside their comfort zone. All of the banks are thinking about this now - about the point of equilibrium."
A glance at the banks' 2019 financial statements shows that the system has entered the crisis in a good position, with large capital surpluses and a good credit portfolio. "However, the magnitude and duration of the crisis are what will decide, so there's no doubt that government support is needed here. This is obligatory, and even critical," the source says, explaining, "Without substantial and all-encompassing support from the state, for payments to employees on vacation and so forth, the banks will be unable to cope by themselves. The Bank of Israel and the state will have to participate in the solution, and lead it." According to the source, the banking system may be able to cope with the situation as is for another month, but a problem will arise after that.
Ber: No credit stoppage; on the contrary
These concerns and challenges have not escaped the notice of Bank of Israel's officials. Ber is sending soothing messages, even though it is clear that she also believes that the crisis is difficult and exceptional.
"Globes": Are you worried that we are on the way to a credit crunch?
"At the Bank of Israel, we intend to prevent a credit crunch in the economy, because it is liable to be a snowball leading to a more significant recession, with a decline in GDP. We're in a snowballing scenario, and the steps to counter the virus are liable to be stepped up from one moment to the next, and it is unclear how long a recovery will take. As the duration of the event lengthens, there is no doubt that its difficulty will become greater. We hope that we won't reach a situation in which the banks have to stop credit.
"The banking system's strength will help the economy get through the crisis," Ber says, and adds "We're acting to give the banks tools in order to provide oxygen to the economy." Concerning a steep drop in new mortgages, Ber says, "There are new mortgages - the banks aren't closing down, and are granting credit under all of the regulatory measures given to them. A the moment, there is no halt in credit by the system; on the contrary… the banks have NIS 14 billion in surplus capital." This surplus could be used to generate NIS 140 billion in additional credit to the public.
Why have you taken extraordinary measures to make it easier for the banks to grant loans and expand them?
"Our aims in all of the measures that we have introduced is to enable the banks to provide oxygen to the economy in order to get through this storm with a minimum of damage to the economy, households, small businesses, and large businesses. We have instituted a great many regulatory measures in order to facilitate that, and the banks themselves have joined the effort to an unusual extent in order to assist customers.
"The governor and I met with the CEOs of the banks a week ago, and called on them to help the economy, because we believe that the banking system in Israel is very stable, has a great deal of surplus capital, large liquidity reserves, and high-quality and widely diversified credit portfolios. We called on them not to turn inward, and not only to manage financial risks, but to come through for the good of the economy. This call was answered immediately by the CEOs, who undertook to do this. In the ensuing days, the banks came up with an array of solutions for various segments of the economy in order to help.
"What have the banks already done? They made concessions on mortgage payments they began offering small and medium-sized businesses credit in the framework of the state funds, and more. Yesterday, we issued a temporary directive canceling a bunch of regulations in order to make it easier for the banks to help their customers. We allowed the banks to unilaterally increase lines of credit for households on the same terms, we relaxed the constraints on remote banking activities without going to the branch, we increased the amounts that could be withdrawn from ATMs, we increased potential credit for contractors, etc. We want the banks to grant credit to construction companies in order to prevent their collapse, when we see what is happening in the capital markets."
Ber is due to leave her position on April 15. Asked whether she will postpone her resignation because of the situation, the Bank of Israel said, "Like everyone else, the governor and the supervisor of banks are devoting their efforts to dealing with the crisis. It is premature to discuss an extension of her term, and if it is decided to do this, we will announce it in an orderly fashion. In any case, the supervisor of banks will advise and assist the Bank of Israel and the incoming supervisor of banks in any way necessary, even after leaving her position."
Published by Globes, Israel business news - en.globes.co.il - on March 16, 2020
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