When the scheme allowing borrowers to defer loan repayments ends on 31 March, there won’t be thousands of Australians defaulting on their loans. Despite preparing for an influx of bad loans due to COVID-19 – and setting aside billions of dollars for it – banks shouldn’t expect to see widespread arrears and defaults.
According to the Australian Banking Association (ABA), 91% of borrowers on a repayment holiday due to COVID-19 have restarted activity on their loans. Among business borrowers, only 5% are yet to resume repayments. This figure is slightly higher for home loans, where 13% still need to get back on track.
Recent data from the Australian Prudential Regulation Authority shows that banks had a total of $60 billion in deferred loans at the end of November 2020. This was around 2.3% of total loans outstanding.
As the COVID-19 crisis worsened in 2020, banks worked to minimise adverse impacts on borrowers, such as defaults and forced sales of their property.
“I think there’s this looming sense that on the 31st of March, if you’ve had a deferral and it’s expired, you’re going to fall off a cliff. It’s just not how it happens, there are several months of working with a customer,” said ABA Chief Executive Officer Anna Bligh.
“No one is going to wake up on the 1st of April to have their house foreclosed on,” she added.
Balance sheets remain strong
Of the 78,556 loans still deferred across the four major banks, 60,562 are housing loans and 11,263 are business loans. The rest are a mixture of personal loans and credit cards.
Loan deferrals reached a peak of nearly one million loans in June 2020, raising fears that this could eventually put banks’ balance sheets at risk.
But Australian banks are now in a much stronger position.
“Sound prudential regulation and stronger underwriting standards improved the resilience of bank balance sheets entering the [pandemic] shock,” said a Fitch Ratings report.
Changing financing options
To avoid defaulting on their loans or selling their property, some borrowers have switched to lower-cost finance options. This is the case at Commonwealth Bank, for example, where approximately 24,000 customers are still on a deferred loan set-up.
“We’re seeing a number of customers take up new loan constructs, such as taking the low fixed rate,” said Angus Sullivan, the bank’s Group Executive, Retail Banking Services.
“And then we’re seeing some customers switch to interest only, which is helping them even further, and then a very small number of customers we’re basically needing to restructure.”
Moving to a next phase of support
Still, the ABA expects some borrowers will still have to make the painful decision to sell their property, though it adds that banks are working directly with those in hardship to find the right solution.
Banks are also moving to a new stage of supporting struggling borrowers. Under this phase, specialised hardship teams will assist customers who are unable to make reduced repayments or restructure their loans.
Banks have also developed an online hub to advise customers in financial hardship of their options.
“This is about ensuring that no customer is left in the dark as we emerge from the pandemic,” said Bligh. “It represents a compact between banks and their customers as we navigate the uncertain path ahead.”