UK banks decide to offer mortgage holidays as a fallout of the coronavirus epidemic

In a move with hardly any precedence, major banking groups in the United Kingdom like Royal Bank of Scotland, Lloyds Banking Group and TSB Bank have decided to offer customers mortgage holidays to help them cope with coronavirus induced disruptions to businesses. The move, while putting undue pressure on the margins of the banks, will help them prevent many of their loans from turning bad. The scare of the coronavirus till now has caused a significant slowdown in business activity in the country with many of the companies already issuing warnings related to revenue and profit growth. For a country which was recovering from a pre-Brexit economic downturn, the coronavirus pandemic has come as a double whammy. It could be an extremely challenging task for the British government to find and implement appropriate policy measures to keep the economy on track and guide it through this challenging period.

The biggest problem with disruptive events like coronavirus pandemic and the pre-Brexit economic downturn is the uncertainty of how long the events will continue. Should such surety be present, it would be possible to make provisions and deal with the disruption, but when certainty is not present, it is not possible to quantify a loss and to scale down business activities becomes a necessity. The business disruption brought by the coronavirus epidemic, however, is quite different from that of the pre-Brexit downturn. In the pre-Brexit era, lack of clarity on policy measures was causing business disruptions which prevented the adoption of measures like mortgage holidays; however, the fallout of the coronavirus epidemic has slowed down business activities by creating logistical bottlenecks, allowing for the adoption of measures that could not be adopted for Brexit.

When a country’s economy is in an unstable condition, the risk of creation of bad loans is at the highest. It is not necessary that a business has to be down and out for it to go into financial distress. Disruptive events like coronavirus epidemic result in elongated periods of business disruptions which can turn the better businesses into sick ones. In such a scenario, it is highly likely that a lot many businesses in the country could find themselves in a distressing situation, thereby creating the risk of massive bad loans piling up in the books of the banking sector. This again creates the risk of further elongation of the distressed economic period, as banks would not be able to fully support improving economic activity levels during the recovery phase. Thus, allowing clients mortgage payment holiday not only helps banks from piling up bad loans but taking in a small loss now helps them prevent more significant losses in the long run.

The policy of allowing payment holidays is not isolated to the United Kingdom alone. Italy has also allowed its residents to delay payment of several taxes and utility bills to help them cope with the disruption in their day to day lives that have been severely affected by the ensuing impact of the epidemic. Lockdowns and restriction on movement of people are severely impacting businesses in conducting their activities while consequently also affecting the livelihood of people working for those businesses. Under such circumstances, everybody is trying to limit his cash outgo and spend only on essentials until better conditions begin to prevail. Saving on non-essential expenditure thus not only allows the businesses sustain through the difficult period but also helps cut down on the recovery time for them to get back to their previous activity levels and also help to cut down on the losses that the country might face if business disruptions continue for long.

Coronavirus pandemic has caused severe business disruptions across the globe. Restrictions on the movement of people and goods have caused several sectors to report a massive fall in their revenues. Scared of long periods of restricted movement, people have already started to stockpile provisions and have begun restricting unnecessary travel. Businesses are also advising their employees to work from home so that person to person contact can be avoided, and the risk of the virus spreading amongst employees is contained. People arriving from infected countries are being thoroughly screened, and the infected ones are being quarantined to prevent them from infecting more and more people. Less air travel has resulted in a smaller number of passengers for the airline industry, and fewer tourists are opting for holidays in overseas destinations, which has now severely impacted the activity levels in both the air travel and leisure industries.

Major public health organisations of the world are working tirelessly to contain the spread of the virus.  Significant progress has already been achieved to decode the genetic properties of the virus, and several types of medication are already proving helpful in test treatment of patients infected by the virus. However, still, a significant amount of time and effort is required to contain this virus and stop its spread to a more substantial number of geographies outside of China. As we write this article, the virus has already spread to more than a hundred countries with deaths being reported in countries like Italy and the United States which are thousands of miles away from the epicentre of the outbreak. This has resulted in a higher number of travel restrictions being put on personnel travelling to and from the infected countries, causing further disruption in business activities.

Economically, the most affected country as a result of this outbreak is China, which has large parts of the country under virtual lockdown. Other than the adjoining East Asian and South Asian countries, the virus has also affected large parts of Europe. It is being hypothesised by many that the intensity of the spread will come down with the onset of summer; however health authorities are not sure about that and are stopping shy of giving a timeline on how long it will be before they are able to contain the spread of the virus.

The United Kingdom was not very hard hit during the breakout of the SARS epidemic and there was only one case of infection in the Republic of Ireland. Unprecedented measures had been taken to protect the country from the outbreak. This time around the situation has become dangerous; more than 300 people are already reported to be infected in the country, and six people have been reported dead. The junior health minister of the country, Nadine Dorries, has tested positive for the virus on 11 March 2020 and it is being reported that she had met hundreds of members in the British Parliament in the past few days. Should a higher number of members, who had frequented the British parliament in the recent past, be found to be infected, the situation could become hazardous. The economic impact on the country, in that case, would be significant and extensive measures would be required to be implemented in order to bring the economy back on track.