
Principal
Revitalization Partners
With COVID-19 causing a drastic decline in revenues for many businesses, lenders have made a number of accommodations for non-performing loans, particularly through short-term deferrals. However, as the pandemic rages on, Bill Lawrence explains why lenders need to be proactive to avoid risk.
Since the beginning of the COVID-19 crisis, the Federal Reserve has taken swift action to provide tools to help banks cope with this anticipated increase in non-performing loans. One of the most sweeping programs, which was aimed at helping small- to medium-sized businesses early in the COVID-19 crisis, was the deferred payment program. If borrowers could not make monthly loan payments, lenders could initially defer those obligations for a three-month period. The deferral period ultimately could be extended to six months or longer based on the lender’s discretion.
Domestic banks’ concerns over the threat was initially revealed in a survey conducted in May by the Federal Reserve Bank of Dallas. Findings showed that 83% of financial institutions expected an increase in non-performing loans within six months, while 27% reported an increase in non-performing loans during the preceding six weeks. Data from a recent November 2020 survey confirmed those threats by reporting an alarming increase in current and future nonperforming loans (see Figure 1).
Because of the magnitude of troubled credits, commercial lenders should be extra vigilant and not wait for loan deferral programs to end before taking action to mitigate loan write-downs. All lenders have tools to continually evaluate and score the creditworthiness of their commercial borrowers. However, there is a risk that the usual warning signs raised by these methods will be somewhat neutralized or minimized by the availability of the current loan deferral programs.

Further, lenders should require that management outline steps being taken to mitigate cash flow declines and insist on monitoring the progress the company makes in achieving its goals. While businesses may resist this added oversight, it should be a condition of acceptance into a loan deferral program, or, at a minimum, be implemented if loan deferrals are required beyond the initially agreed upon period.
Resetting Expectations
Biggest U.S. Banks Have More Than $150 Billion of Deferred Loans,” Bloomberg, Aug. 2020