As banks begin to help their small and midsize commercial borrowers obtain financing under the CARES Act, the reality is setting in just how severely the economy is being disrupted by the coronavirus.
As unemployment increases, consumers start to miss payments, and the distress is passed on to businesses.
Even though the CARES Act provides a stimulus package of $2.39 trillion, or 11.4% of gross domestic product — along with a relaxing of rules surrounding payment deferrals and loan modifications by banking regulators — that may not be enough to blunt the continued decline in economic activity.
Indeed, the Federal Reserve on Monday announced a lending facility intended to backstop the Paycheck Protection Program, the $350 billion lending program passed under the CARES Act that is aimed at businesses with 500 or fewer employees.
The program is one of a host of initiatives intended to stanch the cascading effects of economic shocks rippling throughout the economy.
Despite the stimulus, as unemployment increases, domestic consumers start to miss payments. The first to be missed are generally tied to debts deemed less essential, such as student loans and credit cards. But as the crisis deepens, these start to include autos and then, eventually, mortgages.
After that, the commercial sector will be next. Businesses will no longer have an employed consumer, let alone an upbeat one, to spend the money on their products or services that produce the cash flows necessary to meet their own debt obligations. It’s at this point that businesses themselves start to miss payments, whether it’s on leases, or financing or other obligations.
While we remain optimistic that easing regulations and the fiscal stimulus being poured into the economy will provide support and assistance to both consumers and commercial enterprises over the near term, it is important for banking organizations to take a deeper look at their borrowers’ needs. For both consumer and commercial clients, banks must determine how best to help them navigate a prolonged period of unemployment and liquidity constraints.
Here are some of the ways that banking organizations can help their customers navigate this difficult time:
- Understand the dynamics of how the coronavirus is affecting your borrowers’ liquidity needs and how stimulus will alleviate near-term cash flow constraints.
- Look at which expenses must be paid to keep the businesses viable while capitalizing on the stimulus.
- Strategize about what the longer-term needs of borrowers will be should the pandemic continue.
- Maintain communication with high or at-risk borrowers; such communication can settle the nerves of a borrower while simultaneously allowing your organization to fully understand the risks of the borrower.
- Stay current on the aid packages available as part of the CARES Act, as well as any developments with processing of applications by regulatory agencies.
- Become keenly aware of how further stimulus may benefit customers as talks of additional stimulus begin to take shape.
During the Great Recession, the banking sector was viewed as the villain. This time around, banks, which are better capitalized and more able to withstand an economic downturn, now have a chance to help save the day.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.