How should a refund moratorium be extended? (Quick assessment)

The essence of the notification

In a Facebook video, Prime Minister Viktor Orbán presented the proposal of the Operational Court of Economic Protection on the moratorium on the payment of loans. According to him, this will also be a government decision, as the government will accept the tribe’s proposal. Based on these, selective and targeted extensions come:

• The credit moratorium has so far helped 1.6 million families and 60,000 businesses, exempting them from a total of approximately HUF 2 billion in loan repayments for December.
• extend the moratorium for another six months (i.e. probably until June 30, 2021) for parents raising children, retirees, the unemployed and civil servants,
• they do not have to visit the bank unless they want to pay despite the possibility of a moratorium,
• The possibility of extending the moratorium is also open to companies, but they must notify their request for extension.
• If your income has dropped more than 25%, you should take advantage of this opportunity from banks,
• Both households and businesses will be prohibited from borrowing for 6 months for loans obtained before the epidemic.

Our evaluation

Extending the moratorium is the right decision in itself, because even if the epidemic is overcome, its economic and financial effects will be prolonged. Many other countries have also opted for an extension, albeit for a typically shorter period rather than 2021.

Medium- and long-term minimization of the proportion of non-performing loans in the banking system is probably best achieved with some extension. The ban on terminating contracts announced in mid-2021 will also breathe the most vulnerable companies. There are also “superinfectives” in the economy: a rapid increase in corporate defaults would lead to a long chain of debt in the economy. At the same time, this would not be the case for everyone: it is necessary to make the moratorium more selective and filter stray passengers.

It seems that the government has rightly paid attention to filtering stray passengers from the system, thus minimizing moral hazard, meaning that those who do not need it also benefit from the refund moratorium. This is most true for businesses, and only businesses that experience a drop of at least 25% in revenue benefit from it. With this, at least superficially examining the issue, the government complies with the proposal of the banking sector and the MNB on a targeted and selective extension of the moratorium.

However, it is difficult to say how targeted and selective the extent of the moratorium really is. Our rough estimate is that roughly half of retail clients and a much smaller proportion of businesses may belong to it cover public workers, the unemployed, like them, may represent a small percentage of creditors). Another big question for companies is based on what data disclosure and during what period the decline in revenue will be examined, Viktor Orbán did not talk about this.

In both retail (opt-out) and commercial (opt-out) (different ways only), banks will likely be responsible for verifying eligibility. So a big issue is the manpower and resource requirements for banks to enforce the new rules: lending institutions may not have all the data to determine which customers meet the criteria. Building related databases can require significant resources, time, IT, and costs for banks. Compared to spring, however, it is a great relief for banks to now have no more than a few days, but more than three months to prepare.

Customers now, of course, are faced with another decision to make before the end of the year. It is likely that the moratorium will still mean an extension of the term for those who remain in it, and an increase in quotas is not yet expected due to the moratorium. Anyone who remains in the moratorium should take into account that the term of their loan can be extended more than 6 months: due to the linear repayment (without interest) of the interest debt accumulated in the meantime beyond the 6-month extension. typically) an additional extension of 1 to 5 months will be required, while the 2020 moratorium has already extended the loan maturity by almost a year.

By the way, the moratorium is of great help to Hungarian debtors: this year it will leave around HUF 2 billion in the coffers of households and businesses. The proportion of loans affected by the default is between 40 and 50 per cent for both households and companies; according to the MNB, the proportion is higher. This is not a coincidence: while households have the lowest average personal loans, businesses have the highest proportion of those living with a moratorium among microenterprises. The moratorium will also slow down the repayment of bank loans and increase the deposit holdings and savings capacity of those involved.