Impact of COVID-19 in the Financial Sector

By Ana Maria Aviles

August 25, 2020
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A sustainable financial center

sustainable development and

value creation in:

economic environmental social

protecting enhancing
economic and cultural
economic prosperity diversity
competitive restoring
efficiency and social
ness ecological
systems well-being

Source: Swiss Sustainable Finance

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Scope: Economic
efficiency

Support Efficient
Financial financial
economic
recovery Stability intermediation

Protect the use

“Non-Performing Loans in of public
resources
East Asia and the Pacific:
Practices and Lessons in
Times of COVID-19”
by Ana Maria Avilés; Katia D’Hulster;
Sameer Goyal; and Cristina Pailhé

• The regional focus of this presentation is the EAP, particularly

ASEAN+China
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Outline:
I. Recent trends of credit quality
II. Vulnerabilities in the financial sector
 Corporate debt
 Household debt

I. Do countries have an accurate picture of NPLs?

• Inconsistencies of NPLs’ definitions

II. Policy measures responding to COVID-19

III. Considerations in addressing NPLs in times of
COVID-19
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I. Recent trends of credit quality in East Asia and
the Pacific (EAP)

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I. Recent trends of credit quality in the region
 EAP: engine of the world economy accompanied by financial deepening
 Before the pandemic, the economy was decelerating and influencing the
credit quality of the banking system
Developing EAP’s GDP growth (annual %) and credit to GDP (%)
250 12
GDP growth (right) Credit to GDP (left)
9.8
10
200 8.4 8.5
7.7 7.5 7.2 8
6.5 6.5

Percentage
6.8 6.4 6.3
150 5.8
Percentage

4
100
2.1
2
50 -0.5
0

0 -2
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019a 2020b 2020l

Sources: World Bank, World Development Indicators; World Bank 2020a.

Note: a = estimate; b = baseline; l = lower case; EAP = East Asia and the Pacific; GDP = gross domestic product.

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I. Recent trends of credit quality in the region
 Banking sector is important for the real economy in the region
 Credit to GDP in developing EAP is the highest in the world
Domestic credit as percentage of GDP

Source: World Bank, World Development Indicators.

Note: CEB= Central Europe and the Baltics; EAP = East Asia and the Pacific; ECA = Europe Central Asia; EU =European
Union; LAC = Latin America and the Caribbean; NA = North America; PIC =Pacific Island Countries. Developing EAP
excludes high-income countries.
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I. Recent trends of credit quality in the region
 As economic growth in the region has been accompanied by the
expansion of the financial systems and continuous credit growth, nominal
figures of non-performing loans (NPLs) have also risen significantly

Domestic credit as percentage of GDP

350

Cambodia China Indonesia Malaysia

300
Philippines Singapore Thailand Vietnam
250
US$ billion

200

150

100

50

0
2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bank for International Settlements and World Bank staff calculations.
Note: EAP = East Asia and the Pacific.

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I. Recent trends of credit quality in the region
 EAP: engine of the world economy accompanied by financial deepening
 Before the pandemic, the economy was decelerating and influencing the
credit quality of the banking system
Non-performing loans to total loans (percentage)

Source: International Monetary Fund, Financial Soundness Indicators; International Monetary Fund Article IV
Reports; and national authorities.

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II. Vulnerabilities in the financial sector

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II. Vulnerabilities in the financial sector
 Corporate debt in many EAP jurisdictions stood among the highest in the
world

Corporate Debt to GDP (percentage), Q3 2019

China 157
EM Asia 123
Singapore 118
Korea, Rep. 102
EM 94
Global 93
Mature markets 91
Malaysia 68
EM Europe 52
Thailand 48
AFME 42
EM Latin… 38
Philippines 31
Indonesia 23

Source: International Institute of Finance 2020.

Note: EM = emerging market; AFME = Africa and Middle East.

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II. Vulnerabilities in the financial sector
 Household debt is a key source of vulnerabilities in some of the EAP
jurisdictions
Household Debt to GDP (percentage), Q3 2019

Korea, Rep. 95
Mature markets 72
Thailand 68
Malaysia 68
Global 60
China 55
Singapore 53
EM Asia 51
EM 40
EM Latin America 24
EM Europe 20
AFME 20
Philippines 16
Indonesia 17

Source: International Institute of Finance 2020.

Note: EM = emerging market; AFME = Africa and Middle East.

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III. Do countries in the region have an
accurate picture of non-performing
loans (NPLs)?

 To get a full picture, NPLs should include those managed by the AMCs
 The definition of NPLs in EAP is still heterogeneous across
countries and not fully aligned with international standards.
 The Basel Committee on Banking Supervision (BCBS) developed
definitions for problem loans, but these have not been consistently
adopted. Two examples below:
 some jurisdictions requiring gross NPL values, while some
allowing NPL figures net of provisions; and
 the criteria for upgrading a restructured loan from nonperforming
to performing status vary across jurisdictions
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IV. Policy measures responding to COVID-19

• The measures implemented by governments to provide

borrower relief can be grouped in three:
1. Funding: Funds and guarantees to borrowers, either
directly or by channeling public funds through financial
institutions;
2. Regulatory relief to financial institutions so that they are
able to keep the flow of credit channeled to the economy;
and,
3. Financial infrastructure: Changes to some elements of
the financial infrastructure so that it accommodates
better to the challenges arising from the COVID-19 crisis.

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IV. Policy measures responding to COVID-19
Area Topic Countries
Cambodia; China; Indonesia; Korea, Rep.; Lao PDR;
Malaysia; Micronesia; Myanmar; Papua New Guinea;
Fresh funds
Philippines; Samoa; Singapore; Solomon Islands; Tonga;
Timor-Leste; Vietnam
Funding Guarantees or credit
China; Fiji; Korea, Rep.; Malaysia; Myanmar; Timor-Leste
enhancements
Capital injection in banks Cambodia
Bond issuances China
Capital buffers Cambodia; Korea, Rep.; Malaysia; Singapore
Capital: risk weights Korea, Rep.; Philippines
Liquidity buffers Cambodia; Korea, Rep.; Malaysia; Singapore

Regulatory China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar,

Liquidity: reserve requirements
relief Papua New Guinea, Philippines
Cambodia; China; Fiji; Indonesia; Korea, Rep.; Lao PDR;
Moratoria, classification and
Malaysia; Myanmar; Papua New Guinea; Singapore;
provisioning
Solomon Islands; Thailand; Tonga; Vietnam
Credit reporting Indonesia, Singapore

Financial AMCs Myanmar

infrastructure Insolvency law Singapore

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V. Considerations in addressing problem loans
in times of COVID-19
• Corporate debt: tools should be in place to deal with
insolvencies.
• During the first stages of the crisis it is important to prevent
viable firms from being forced into insolvency,
• In a second stage, it is vital to ensure the smooth functioning
of workouts and debt-restructuring mechanisms.
• Household debt: countries will benefit from implementing
mechanisms for modern consumer bankruptcy
frameworks, ensuring flexibility for debt rescheduling and
repayment plans.
• Real estate market: effective procedures to deal with prompt
resolution of real estate collateral are required. Modern
mechanisms to resolve mortgages, especially, are
necessary in anticipation of an escalation of defaults.
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V. Considerations in addressing problem loans
in times of COVID-19
• SOE lending: promote an even playing field (e.g. remove excessively
relying on government implicit guarantees of SOEs). The credit
quality of SOEs has to be evaluated and assessed on the basis of
their own ability to maintain sustainable cash flows, as with any
other private firm.
• Credible exit strategies are critical. An unplanned removal can
cause a sharp rise in NPLs and a significant negative effect on banks’
financial health. Moreover, any additional policy response should
minimize opportunities for moral hazard and maintain adherence to
sound credit risk management practices. Policy responses have to
be time bound, have clear sunset clauses and exit strategies, and
have to be targeted to ensure that only viable borrowers benefit.
• Proactive: Effective and early workout and resolution of NPLs are
central to avoid loss of confidence in the banking system and to
ensure that bank lending continues to support growth.
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Thank You!