MAS Planning Ahead to Avoid ‘Cliff Effect’ of Relief Withdrawal

Source: Regulation Asia Editors, Regulation Asia 2020-07-17

“Bank loans and insurance policy premiums will eventually have to be paid,” MAS’ Ravi Menon said, pointing to a need to avoid the ‘cliff effects’ of sudden relief withdrawal.

MAS (Monetary Authority of Singapore) is in active discussions with banks, finance companies, and insurers on how to ease borrowers and policyholders into gradually resuming repayments, when the relief measures expire towards the end of the year.

Repayment has been deferred on nearly 34,000 mortgage loans, more than 5,300 secured SME loans, and more than 25,000 life and health insurance policies.

“Bank loans and insurance policy premiums will eventually have to be paid,” MAS Managing Director Ravi Menon said at the MAS Annual Report 2019/2020 Virtual Media Conference on Thursday (16 July).

“Deferment incurs interest cost, which means larger outstanding balances at the end of the deferment period,” he said. “We want to avoid ‘cliff effects’ of a sudden withdrawal of these reliefs.”

According to Menon, the pace of resuming repayments needs to balance between two things: borrowers’ cash flow situation, and the accumulation of more debt which could increase the risk of default further down the road. More details will be announced by October to allow borrowers time to adjust.

The swift and substantial fiscal response has been the centrepiece of the government’s support for the economy, Menon said, pointing to SGD 93 billion in fiscal outlay across four Budgets within the span of a hundred days as the Covid-19 crisis hit Singpore.

He highlighted a push to provide businesses and households with support through cash transfers, wage subsidies, property and income tax rebates, as well as additional measures to ensure SMEs had access to affordable credit.

MAS itself, Menon said, responded to the Covid-19 crisis by ensuring monetary and financial stability; providing credit and insurance reliefs for individuals and SMEs; and providing regulatory relief for financial institutions, among other measures.

He warned that over-leveraged entities could face financial distress, leading to ratings downgrades and corporate defaults, which will strain banks’ profitability and capital positions.

“If this happens, banks will be less able to sustain credit to the real economy,” Menon said. “Worse still, if funding conditions also tighten and confidence is shaken, some banks could run into trouble, possibly triggering a financial crisis.”

Yet, he noted that banks and insurers remain resilient, and their capital ratios remained above minimum MAS requirements, in every stress scenario tested.

Notwithstanding the stress test results, MAS has been in close discussions with the banks and insurers on their capital management plans to ensure they retain adequate capacity to continue providing financial services to support the economy “even in extreme tail risk scenarios”.

According to Menon, the longer term recovery from Covid-19 is likely to be slow, uneven, weak and gradual. “We are not at the beginning of the end, but rather at the end of the beginning,” he said.

MAS

COVID-19

deferred repayment

MAS Planning Ahead to Avoid ‘Cliff Effect’ of Relief Withdrawal

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