Watchdog asks banks to go easy on customers struggling with coronavirus crisis

Banks told to ‘exhaust all available avenues’ before initiating legal proceedings against those suffering from impact of pandemic on economy

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Yair Avidan takes up his post as Supervisor of Banks at the Bank of Israel on May 17, 2020 (Courtesy)
Yair Avidan takes up his post as Supervisor of Banks at the Bank of Israel on May 17, 2020 (Courtesy)

Israel’s banking watchdog has a letter to lenders requesting them to tread lightly with customers experiencing financial difficulties in this time of economic crisis and reminding them to “try to exhaust all available avenues” before initiating legal proceedings against customers who have trouble repaying loans.

“In accordance with existing Supervisory Directives, if a customer experiences financial difficulties and has trouble meeting his obligations toward the banking corporation, the banking corporation must try to exhaust all available avenues to collect all components of the debt before initiating legal proceedings, while maintaining fairness and transparency throughout the debt collection process,” Yair Avidan, the Supervisor of Banks at the Bank of Israel, wrote in a letter to lenders.

“This is even more the case in the current situation, and as such, the banking corporations are being asked to continue operating in this manner with even greater intensity than usual, with the aim of identifying difficulties and helping their customers get through this challenging period as quickly as possible, so that they can help prevent the escalation of debts and future deterioration of their customers’ situations,” the letter, dated June 24, said.

Even as restrictions on most of the economy have eased, and the nation has returned to economic activity, the impact of the crisis has not ended, and “many households and businesses are affected and will continue to be affected from the consequences of the crisis,” both in the short and the long term, the letter said.

Against the background of high unemployment and the hit to the financial resilience of customers from diverse sectors of the economy, “these face significant challenges, as their income and earning capacity have been significantly damaged,” the letter added.

“The coronavirus crisis has not yet run its course, and the banks must therefore continue investing efforts and resources in the early detection of difficulties among their customers, try to help them meet their obligations, and work with them to reach arrangements before initiating legal proceedings,” Avidan said.

To make it safer for the banks to lend money, the central bank has lowered the capital requirements lenders must have in their coffers — a ratio of equity as a percentage of risk-weighted assets — to enable the system to increase credit to the economy. The central bank has also eased regulations to allow banks to enable customers to postpone loan repayments, and announced a NIS 50 billion purchase of bonds to provide liquidity to the market.

Since the start of the crisis, Israeli banks have been allowing customers to defer loan payments. From the beginning of the crisis through the end of April, the banks deferred loans for approximately 450,000 customers, for a total of NIS 5.2 billion, an “unprecedented” level, the Bank of Israel said in a statement in May.

Even so, Israeli banks have come under scrutiny for their “piggish” behavior and their unwillingness to stand by some of their smaller and weaker clients, by denying them access to government-backed loans, as they deem them too risky.

The pandemic has caused unemployment to reach unprecedented levels of as much as 27.8% on May 10, with over a million people unemployed and furloughed at the height of the crisis, as lockdowns and social distancing steps were taken in response to the pandemic.

Israel’s economy is expected to contract in 2020 by some 6.2%, or by 8.3% if there is a second wave of the virus, compared to last year, an OECD report said earlier this month.

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