We’ve all had our share of storms in various forms.
For banks and their clients, this protracted storm caused by COVID-19 continues to cast a pall over multiple economies that are already in recession. Undoubtedly, the situation calls for strong and enduring bonds of collaboration among banks, their clients, and their clients’ clients.
In this pandemic, we have seen how these partnerships between bank and client play a key role in our economic recovery.
In the first few months of the quarantine, outside of health and safety, the principal concerns of many businesses were liquidity and facilitating economic activity, i.e., moving goods and services and enabling payments. In general, the finance sector was able to respond and adapt to address payment handling quite quickly. In the face of uncertainty for businesses and individuals, the knee-jerk reaction was to shore up cash, which meant drawing cash, holding back payments or both. Many who had access to credit utilized such facilities.
Banks had to ensure that they remained liquid to prevent panic. The Bangko Sentral ng Pilipinas (BSP) also recognized the potential risk and was quick to react through monetary easing.
So far, the BSP has reduced the policy rate by 200 basis points from 4% to 2%. The Reserve Requirement Ratio for commercial banks was also reduced from 14% in April to 12%; this increased the ability of the banking system to lend an incremental amount of approximately Php 200 billion.
In addition, loans given out to MSMEs, or micro, small, and medium enterprises, are now considered part of banks’ compliance with reserve requirements. Data from the BSP as of October show MSME loans under this setup at Php 121 billion.
Morphing challenges (and opportunities)
With the matter of liquidity and payment logistics addressed, businesses and banks could focus on business and credit risk. Determining business prospects and credit risk was much simpler pre COVID-19. Most businesses (as well as various financial and sector analysts and specialists) have elected to use 2019 performance as the high watermark for business performance. Recovery now means returning to 2019 levels.
Essentially, business owners, managers, and lenders need to assess the impact of the pandemic on their cash flows.
How will demand change going forward?
How will market behavior change?
How will processes and the cost of doing business change?
How affordable will products or services be?
How will regulators behave? Etc.
This exercise is further complicated by the need to assess when and how COVID-19 vaccines would be made available on a mass scale, and how governments will manage the spread of the virus in the meantime.
The situation has also created opportunities and provided potential for increased traction for certain businesses (e.g., video-conferencing) and processes or technologies (e.g., online food services/shopping and payments).
Low-risk and high-risk industries
Businesses that provide essential goods and services, such as food, telecoms, computer services and pharmaceuticals, would be low-risk industries. High-risk industries are those where demand for their products is more discretionary, such as air transportation, tourism and accommodation, restaurants, and automotive.
At the Bank of the Philippine Islands (BPI), classifying industries into risk categories allowed us to prioritize our reviews and conversations with our borrowing clients. It does not necessarily follow that we would automatically collect from or avoid businesses in high-risk industries and that we would be more open to those in the low-risk category. At BPI, we decided early on to work with our clients towards addressing their challenges. For companies that were performing well before this storm, we recognize that the impact of the pandemic is not caused by poor management.
As we experience the economic impact of the pandemic, the lasting negative impact on certain businesses and industries will only be known in the coming year or two. We will also know the implications of this crisis on the lending portfolio of banks by that time. Frequent client dialogue has never been so critical as now.
What banks can do
Based on risk assessments and client dialogues, banks will be able to form views and customize financial solutions that would allow borrowers to weather this crisis.
At BPI we recognize that, in this challenging time, cash flow is essential. We think of survival first and profitability will follow. During this crisis, our clients find the exchange of views on economic outlook and industry impact useful in deciding on how to adjust or pivot their businesses. We have conducted multiple webinars around economic outlook as well as industry and global trends to maximize client reach while sharing fresh information and views.
Banks should certainly continue to help fuel growth of businesses operating in bright spots in our economy. We are supportive of clients who have decided to retain employees even with a compromise against positive cash flow and turning in a profit. Keeping people employed will help in our economic recovery.
What borrowers can do
We believe the most important step for borrowers is to have a realistic assessment of the prospects of their businesses. There are businesses, such as those in the essential goods and services sectors, that will be okay, if not do better under the circumstances. Many will be negatively affected, but could be expected to bounce back as the mobility of people is restored. Unfortunately, there are businesses, especially those challenged even prior to "COVID 19", that will struggle to survive until the “next normal.”
Preserving resources and remaining liquid would be generally applicable across most businesses. This can be achieved by optimizing inventory buildup, reducing expenses, managing receivables and delaying capital outlays. More frequent business reviews and checkpoints will also be a good discipline to adopt.
Borrowers and banks are partners in many ways; both succeed together. This pandemic can be a catalyst for strengthening relationships as we ride out the same storm together and look forward to a “better normal.”
This was published in the Philippine Daily Inquirer on February 1, 2021.
To be a saver-for-life and to be a life-saver