The wave of bankruptcies has been postponed only slightly and will break out in 2021


For the third time in six months, the Bank of Israel publishes an outline that allows for an extension of the freeze on consumer loans to households until the end of the year. The Bank of Israel’s decision to allow a further deferral in the payment of household loans is a clear sign of a wave of bankruptcies that the corona crisis will bring.

But freezing loans is not a cure for the situation, it is at most a temporary painkiller. Eventually borrowers, banks and non-bank credit providers will have to deal with a wave of bankruptcies that will hit the economy.

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When the corona crisis broke out in March, the first loan freeze outline was published, under which loans could be frozen for up to six months. It was estimated that by then the economy would recover, most borrowers would be able to repay their loans again, and those who failed to recover would be forced to make a debt settlement. And if their situation is difficult – then get to the procedure of Bankruptcy.

Half a year has passed, and not only is the economy not in a recovery trend, but it is also in a retreat following the second closure that leads to the closure of businesses and the resumption of workers to the Knesset. It is that the wave of bankruptcies that were estimated to reach the economy in September-October at the beginning of the crisis has now been postponed to 2021.

Data from the Bank of Israel published yesterday show that so far close to 740,000 loans have been frozen in the amount of NIS 160 billion, which constitutes over 15% of the total loans in the banking system. The total debt payments that have been deferred and have not been repaid since the beginning of the crisis is NIS 9.5 billion.

It is difficult to know the depth of the economic crisis. This is because the economy is in fact under the soul machine: on the one hand the freezing of bank loans and on the other hand state support expressed in the payment of unemployment benefits and grants to the self-employed. When one of these steps is stopped, the wave of bankruptcies will begin, and if the steps stop together, then the intensity of the crisis may be fully revealed.Repotea.

Governor of the Bank of Israel Amir Yaron Governor of the Bank of Israel Amir Yaron Photo: Alex Kolomoisky

As mentioned, it is still difficult to know what the scope of bankruptcies will be in a crisis. But it can be estimated that as the recovery period in the economy lengthens, so is the fear that the wave of bankruptcies will be deeper than estimated. The reason is that at the beginning of the crisis there were still businesses that could rely on pre-crisis reserves or loans taken from the state-guaranteed fund. Now these fats are dwindling, and the task of recovery from the crisis is becoming more difficult.

Along with this pessimism, there are also those who maintain cautious optimism in the banking system. “The economy reaches the second closure when it is less hysterical,” says a senior figure in the banking system. “The uncertainty is lower than in March, because we already know what it means to go through a closure. In addition, both businesses and households have undergone a process of reducing spending in recent months, so they are better prepared now to deal with declining revenues.”

Meanwhile, the banking system notes that there is no high demand for additional loan freezes following the second closure. Some banks point out that there has been some increase in interest in the mortgage freeze in the past week, but these are not yet significant numbers. However, in their estimation, the increase in unemployment will lead to an increase in the mortgage freeze. It is estimated that such a wave of demand for freezes is expected to register after the holidays, when the picture regarding the continuation of the closure and return to routine will become clear.

The main good news in the new outline is in consumer credit – a loan for a household that is not a mortgage. Anyone who has a loan of up to NIS 100,000 will be able to extend the freeze period. Originally, the Bank of Israel was able to freeze the loan for six months, and now it is possible to extend it until the end of the year. That means the freezes could last up to 9 months.

Closed businesses.  There were no reserves left Closed businesses. There were no reserves left Photo: Alex Kolomoisky

In addition, if in the original outline it was possible to apply for a loan freeze – consumer credit, mortgages and business credit – until the end of October, it will now be possible to submit the application by the end of the year, and the freeze will be granted for up to six months.

Significant relief in this outline may have been given in consumer credit, as it is the area that has recorded the slowest recovery since the onset of the crisis. Since the end of the first closure, only some of the borrowers have returned to repay the frozen loans. Bank reports show that in mortgages over half of those frozen were repaid and close to half of business credit was repaid. However, in consumer credit the recovery was slow, and data showed that less than 40% of frozen loans were repaid.

It is important to emphasize that while in previous outlines the Bank of Israel allows for automatic deferral of the principal and interest on the loan, this time the principal freeze is automatically extended for anyone who applies, while the interest freeze is not made automatically. The goal is for households to pay at least the interest rate, so that their return to routine is graded.

The goal is also to identify borrowers who are in serious distress, and especially request an exemption from the interest payment, although this is usually a relatively low monthly payment.

H"About Jacob Margie. "The entry of credit card companies into the credit market also involves social responsibility" MK Yaakov Margi. “The entry of credit card companies into the credit market also involves social responsibility” Photo: Knesset Spokeswoman Adina Velman

As early as July, the Bank of Israel may extend the loan freeze on mortgages until the end of the year. That is, the majority of borrowers who are due to repay their loans in October are from the business sector.

Although the Bank of Israel allows the new outline to apply for a loan freeze until the end of the year, those who have already asked to freeze loans at the beginning of the crisis, in March-April, are expected to repay them again in October.

The Bank of Israel environment indicates that the banks will be able to continue to freeze loans to small businesses as well, since the outline is voluntary and therefore indicates only the minimum framework for freezes, so that the banks can expand them.

However, the banking system points out that such a freeze is not a matter of course for them and will involve, among other things, making provisions for credit losses in respect of those loans. Therefore, banks intend to do so carefully and sparingly.

From the Bank of Israel’s point of view, at present, there is no intention to allow banks to make accounting concessions on this issue, given the level of risk that currently characterizes the credit market for the small business sector.

Banks do not want to resort to debt settlement or aggressive collection proceedings with businesses when the loan freeze expires, so they intend to take creative solutions in the situation that has arisen. For example, redeploying the loan for a longer period, refinancing the loan into a longer-term loan or with a gradual repayment.

The outline for freezing loans published by the Bank of Israel is a voluntary outline. This means that you do not have to join it. The entire banking system complied with the outline, and on the other hand, the credit card industry, which is also supervised by the Bank of Israel, partially joined, as of this writing. The only company to join the outline is ICC, but it also did not fully adopt it. ICC announced yesterday that it will automatically allow its customers to defer loans for a period of three months, while the Bank of Israel’s outline allows for a deferral of six months.

The credit card company Max states that they also allow loans to be deferred to all their customers, and that in practice since March it has been approving requests to defer loan payments to all customers who need it due to the corona crisis.

The non-joining of the credit card companies to the outline has provoked criticism, especially in light of the fact that in recent years the volume of loans to households granted by these companies has grown sharply. Calcalist has learned that the Bank of Israel is formulating a unique outline that will suit credit card companies.

The chairman of the Economics Committee, MK Yaakov Margi (Shas), sent a letter to the Supervisor of Banks and called on him to include the credit card companies in the outline. “I regret the absence of the credit card companies. You must work harder to attach them to this outline. It should be made clear to companies that their entry as full-fledged players into the consumer and business credit market also involves taking social responsibility. “

Credit card companies rejected the audit. Industry insiders explained that they refused to join because they felt the level of risk in the outline was too high. “There is not enough control in the outline, and according to the outline, the repayment of loans to problematic customers should also be postponed,” said an industry source. Another senior official explained that the proposed outline is adapted to banks and not to credit card companies. “Credit card companies have different characteristics from banks in a variety of issues such as capital structure, and the information that banks have about customers is significantly wider than the information that credit card companies have. Therefore, it is not possible to apply an outline that suits banks to credit card companies.”

In addition, the credit card industry notes that when they sought to join the program according to which the Bank of Israel provided banks with cheap liquid sources for providing credit in a crisis, they were refused. “It is impossible that in some things we are expected to act like the banks, and in some things we are excluded,” said an industry source.

The credit card industry notes that although they have not fully adopted the outline, the companies allow customers who have difficulty deferring the payment of loans. Although this is not done automatically, but individually while assessing the borrower’s level of risk. “We are making an effort to go towards the customers,” says an industry source.

In the banking market there are data on the status of loans and their freezing, but in the non-banking market the picture is much more vague. It is not clear what the scope of the frozen loans is, and what policy is at the discretion of each body. In a sense the non-banking market is a kind of black box. This is because the non-banking market, which today accounts for close to a quarter of total consumer credit, is relatively new, including Fintech and P2P companies that provide consumer loans in a number of models, which came under the supervision of the Capital Market Authority in recent years.

Among the companies in the industry do not provide data, but describe how they are coping with the current crisis. “Already at the beginning of the crisis, we decided to prepare for a long-term event and we tightened our credit policy,” said a senior official at one of the non-bank credit companies. “It means we look at things in depth, raise standards significantly and do everything to protect our lenders. However, the crisis has brought many more customers to our door – quality customers who failed to get credit from the banks and we got them. So the bottom line is the numbers have not changed, they Just divide between more customers. “

Another senior official at another non-banking company said that the public was acting more responsibly and calmly around the second closure, noting that “as of today we do not see any increase in loan deferral applications, compared to the first closure which we saw a very aggressive increase in two days. “Nothing dramatic, there is no hysteria that characterized the previous wave.”

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