In the midst of the health crisis, the French government unblocked lending to enable businesses to stay afloat. With a grace period of a year, repayments for these loans will start in spring 2021. It’s time for banks to get organized and equip themselves in order to manage these complex lending instruments.
Responding to an unprecedented situation with an unprecedented solution, the French government set up state-backed loans at the end of March 2020 to alleviate the difficulties faced by businesses. Micro businesses and SMEs subscribed to this scheme en masse, either because they needed to as a precaution, or because they were concerned for the future.
The idea is straightforward enough: a cash loan is granted by banks so that businesses can pay their overheads, despite their operations drastically declining, or even coming to a total standstill. Paying suppliers, bills, rent and wages – the loan can cover up to three months’ turnover and comes with a sovereign guarantee of up to 70 to 90 percent, via BpiFrance. In total, the state can grant 300 billion Euros worth of loans until December 31, 2020. This package, which according to the media is “powerful” and “based on consensus”, has been extended to the tourism industry in August with “seasonal” state-backed loans.
A wave of (non) payments
In order to take advantage of this scheme, businesses just need to apply to their bank. The rejection rate is below 3 percent and only property investment companies, businesses placed into receivership, lending institutions and financing companies are not eligible. The repayment rate is set on a case-by-case basis, but it generally low: from 1 to 1.5 percent for loans repaid by 2022/2023, and up to 2.5 percent for repayment over four to six years.
These state-backed loans, however, are not a gift and must be repaid. After the first year, beneficiaries will have to choose a repayment plan over 12 to 60 months. What’s more, banks are liable for part of the risk involved; and for them, the main issue will be planning for the next stages. The very nature of these loans and the current context imply a probable rise in collection problems in the midterm. According to Zalis, this represents an “impossible challenge”.
If the borrower defaults, lending institutions can only recover 70 to 90 percent of the amount loaned via the state guarantee. And given the high number of business that have registered for this package, these sums are far from insignificant.
Gearing up for processing
The volume of data requiring processing represents a second danger. The biggest impact of the crisis may come in six months when businesses that took out loans at the start of the crisis (as of March) will have to start paying them back in spring 2021. For the banks that granted a substantial number of these loans, they will have to anticipate managing a large number of probably complex files, with the possibility of reduced repayments. Banks may suffer significant financial losses if they are poorly prepared. This eventuality should encourage them to implement sustainable risk management and collection tools.
Preparing banks for the risks
As with any regulated financial tool, state-backed loans require specific expertise. When this scheme was developed, the focus was on rapid roll out. As such, banks have not had time to adapt their traditional systems. Banks that are already scaled and equipped to manage large volumes of corporate loans will just need to adjust their systems, but for all of them there will be three impacts on internal processes and systems:
- Risk analysis must take into account the fact that some businesses will no longer be using traditional processes, and they will be combining several assistance schemes in addition to state-backed loans; for example, deferred social security contributions and deferred repayment schedules
- Specific Bpi reporting and specific processing procedures will be required
- For collection, employees responsible for monitoring state-backed loans may be slowed down by software that is not suitable for the volume and complexity of these loans. In emergency situations, they will somehow have to adapt consumer loan administration processes or even their spreadsheets to manage the surge of data
How to get prepared
There are specific steering tools, such as SBS Risk Management and SBS Collection Management which facilitate optimized collection, thanks to an automated system. This includes a reminder of key dates and tasks; the option of accessing information the bank holds on its customers to take effective action with reminders and specific solutions; and regulatory and non-regulatory reports automatically produced. For small and medium-sized businesses, it will be important to anticipate resumption of interest and social security contribution payments.