Coronavirus recovery: protect lenders and borrowers to ease bad loan damage
- More than ever, banks must strike a delicate balance between extending needed lines of credit to borrowers while also safeguarding themselves against bad debt
- Banks must continue to lend while anticipating loan losses, and shielding lenders and borrowers while managing bad loans is essential to an economic recovery
In the wake of the Covid-19 pandemic, banks have experienced a spate of credit losses. These might be unavoidable for some time as governments, financial institutions and borrowers all try to navigate through the crisis.
Spurred by the pandemic, S&P Global Ratings expects aggregate global credit losses for 2020 and 2021 to hit about US$1.8 trillion. According to its 2021 forecast published last July, North American and Chinese banks will continue to lose US$240 billion and US$398 billion respectively. Across the Asia-Pacific, loans have plunged as the pandemic has made banks more reluctant to lend. This is in line with their counterparts across the globe.
Governments are acutely aware that shrinking credit and capital would have multiple disastrous effects on the economy as a whole. Companies would face financial constraints and cut corporate investment. In extreme circumstances, companies could file for bankruptcy and investors would lose money.
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