Coronavirus (COVID-19): EBA Guidelines on Legislative and Non-legislative Moratoria on Loan Payments Applied in the Light of the COVID-19 Crisis
In the context of the development of the international epidemiologic situation determined by the spread of coronavirus COVID-19, the states around the globe have taken exceptional measures for the protection of public health, with negative effects caused by the limitation or interruption of social and economic activities. In order to minimise the negative effects on some categories of debtors in loan contracts, states such as, among others, Spain, France, Italy and Portugal have implemented legislative measures aimed at supporting the liquidity of undertakings and moratoria (payment deferrals) of payments under loans granted by banks or other financial institutions.
In Romania, the Government adopted the Government Emergency Ordinance no. 37/2020 that provides the right of debtors whose incomes were directly or indirectly affected by the serious situation caused by the COVID-19 pandemic to suspend their payment obligations related to due instalments under the loans, representing principal, interest and commissions, for a period between one month to nine months. The implementing norms of such emergency ordinance have been included on the agenda of the Government meeting and the adoption and publication of such are imminent. Prior to enactment of such emergency ordinance, according to a press release dated 24 March 2020, the National Bank of Romania decided to allow banks to temporarily use the previously built capital buffers (up to a date that will be subsequently communicated), so that the banks be able to support the real economy by granting loan payment delays to affected debtors.
As a complement to the efforts of various Member States and also of the European Commission, the European Banking Authority (EBA) published on 2 April 2020 the Guidelines on legislative and non-legislative moratoria on loan payments applied in the light of the COVID-19 crisis (the “Guidelines”). The declared aim of the Guidelines is to clarify the requirements for public and private moratoria, which, if fulfilled, will help avoid the classification of exposures under the definition of forbearance or as defaulted under distressed restructuring.
EBA considers the payment moratoria (payment deferrals) as effective tools to address short-term liquidity difficulties caused by the limited or interrupted operation of many businesses and individuals as an effect of the measures for the prevention of the spread of COVID-19.
In this respect, the Guidelines clarify that payment moratoria do not trigger classification of exposure as forbearance or distressed restructuring if the measures taken are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by the relevant credit institutions. Still, institutions must continue to adequately identify those situations where borrowers may face longer-term financial difficulties and classify exposures in accordance with the existing regulations.
These Guidelines address three main aspects:
- the criteria that payment moratoria have to fulfil not to trigger forbearance classification;
- the application of the prudential requirements in the context of these moratoria;
- ensuring the consistent treatment of such measures in the calculation of own funds requirements.
A moratorium shall be considered a general payment moratorium where all of the following conditions are met:
- the moratorium is based on the applicable national law (legislative moratorium) or on a non-legislative payment relief initiative of an institution as part of an industry- or sector-wide moratorium scheme agreed or coordinated within the banking industry or a material part thereof, possibly in collaboration with public authorities, such that participation in the moratorium scheme is open and similar payment relief measures are taken under this scheme by relevant credit institutions (non-legislative moratorium);
- the moratorium applies to a large group of obligors predefined on the basis of broad criteria, where any criteria for determining the scope of application of the moratorium should allow an obligor to take advantage of the moratorium without the assessment of its creditworthiness; examples of such criteria include the exposure or sub-exposure class, industry sector, product ranges or geographical location. The scope of application of the moratorium may be limited only to performing obligors, who did not experience any payment difficulties before the application of the moratorium, but it should not be limited only to those obligors who experienced financial difficulties before the outbreak of COVID-19 pandemic.
- the moratorium envisages only changes to the schedule of payments, namely by suspending, postponing or reducing the payments of principal amounts, interest or of full instalments, for a predefined limited period of time; no other terms and conditions of the loans, such as the interest rate, have to be changed;
- the moratorium offers the same conditions for the changes of the payment schedules to all exposures subject to the moratorium, even if the application of the moratorium is not compulsory for obligors;
- the moratorium does not apply to new loan contracts granted after the date when the moratorium was announced;
- the moratorium was launched in response to the COVID-19 pandemic and was applied before 30 June 2020. However, this deadline can be revised in the future depending on the evolution of the current situation associated to the COVID-19 pandemic.
Separate general payment moratoria may apply to different broad segments of obligors or exposures.
If the above conditions are met:
- the application of the general payment moratorium in itself should not lead to reclassification of the exposure as forborne (either performing or non-performing) unless an exposure has already been classified as forborne at the moment of the application of the moratorium.
- where institutions grant new loans to obligors subject to a general payment moratorium, this does not automatically lead to reclassification of exposures as forborne. However, the classification should be considered on a case-by-case basis in accordance with incident legal provisions.
Throughout the duration of the moratorium, institutions should assess the potential unlikeliness to pay of obligors subject to the moratorium in accordance with policies and practices that usually apply to such assessments. Where manual assessments of individual obligors are performed, institutions should prioritise the assessment of obligors for whom the effects of the COVID-19 pandemic are most likely to transform into longer-term financial difficulties or insolvency.
Institutions that apply a non-legislative general payment moratorium should notify their national competent authorities of this and provide the following information:
- the date from which they apply the moratorium;
- the selection criteria for exposures subject to the moratorium;
- the number of obligors and exposure amount within the scope of the moratorium;
- the conditions offered based on the moratorium including the duration of the moratorium;
- the distribution of obligors and exposures within the scope of the moratorium across the rating grades (or an equivalent measure of risk) used for internal reporting purposes.
Institutions should collect and have readily available at least the following information:
- clear identification of the exposures or obligors for which the moratorium was offered;
- clear identification of the exposures or obligors to which the moratorium was applied;
- the amounts that were suspended, postponed or reduced because of the application of the moratorium;
- any economic loss resulting from the application of the moratorium on individual exposures and the associated impairment charges.
National competent authorities should notify EBA of any use of general payment moratoria in their jurisdictions and provide the following information:
- whether it is a legislative or non-legislative moratorium;
- in the case of a legislative moratorium, whether it is compulsory for institutions or, if it is not compulsory, whether institutions are publicly encouraged in some way to use the moratorium;
- in the case of a non-legislative moratorium, the extent of the use of the moratorium by the banking industry in their jurisdiction;
- the date from which the moratorium applies;
- the selection criteria for exposures subject to the moratorium;
- the conditions offered based on the moratorium including the duration of the moratorium.
The Guidelines have been drafted in accordance with Article 16 of Regulation (EU) No 1093/2010 (EBA Founding Regulation), which mandates EBA to issue guidelines addressed to all competent authorities or all financial institutions and issue recommendations to one or more competent authorities or to one or more financial institutions, with a view to establishing consistent, efficient and effective supervisory practices within the European System for Financial Supervision, and to ensuring the common, uniform and consistent application of Union law.