On 18 March the Hungarian prime minister announced extraordinary measures to be taken as a result of the national emergency caused by COVID-19. Most of these measures have a strong impact on the Hungarian economy; in particular, the banking sector.
A moratorium has been introduced for all retail and corporate financings. Capital, interest and fee payment obligations for all loan, credit and financial leasing agreements have been suspended until 31 December 2020. Irrespective of the moratorium, debtors may of course continue performing their contractual obligations if they would like to.
Under the moratorium, the due date for fulfilling contractual obligations under financing agreements will be extended in line with the term of the moratorium. Due to the extension, security interest is also impacted (irrespective of whether ancillary or not and are incorporated into an agreement or a unilateral declaration). Contracts expiring during the national emergency will also be prolonged until 31 December 2020.
The annual percentage rate of consumer credit agreements not secured by mortgages/pledges concluded from 19 March onwards will be limited. The annual percentage rate of such credits will be the maximum base rate + 5% of the central bank.
The government introduced these measures after the Hungarian National Bank urged banks to apply for a moratorium during this national emergency, and if not, suggested the government should introduce a moratorium instead. The Hungarian National Bank also introduced a moratorium in its Funding for Growth Scheme (FGS) and changed certain terms of the FGS (e.g. banks may restructure their financings provided for SMEs in the FGS). Pursuant to the moratorium, SMEs which have applied to the FGS, and banks having refinanced loans due to the FGS, are exempted from their payment obligations until the end of the year.
Furthermore, certain sectors are facing serious issues, such as tourism, hospitality, the entertainment industry, sport, cultural services and passenger transport. Thus, until 30 June, the government has decided to release employers in these sectors from social contribution payment obligations. The government also reduced the social contribution payment obligations of the employees: they are not obliged to pay pension contributions and the amount of their social healthcare contribution is reduced to the minimum.
Are these measures necessary?
Due to COVID-19, companies providing services or manufacturing products which are not essential receive less income each day – even if these companies have a strong market position under normal market circumstances. Companies that require face-to-face contact due to their services are facing similar issues.
Certain employees struggling with these issues do not have enough liquidity to finance their day-to-day operations (in particular, salaries of employees) and have no chance for a loan in the current situation. As a result many companies will dismiss their employees during the next months, i.e. unemployment rate is expected to increase dramatically.
Under the moratorium, these companies are temporarily relieved from their repayment obligations – thereby relieving cash-flow - with a chance to avoid mass dismissals or even bankruptcy, thereby relieving concerns of employees about possible job loss.
Nevertheless, the moratorium in itself might not be sufficient. Many companies operate in a way that the debt servicing obligation is not the only – and might not even be the biggest – part of their expenditures. Also the extension of procedural and legal deadlines may be envisaged to have the moratorium work efficiently.
Right for opting out
During the moratorium, capital and interest payment obligations are suspended. However, unpaid interest will be continuously calculated to the capital, and at the end of the moratorium, debtors must repay their debts including this compound interest. This may lead to a significantly higher debt. Of course, debtors may opt-out from the moratorium thus they can avoid such increase of their debts.
Difficulties for banks
Banks face three kinds of challenges at the moment: they must protect their capital, maintain liquidity and secure their operations. The capital position of the Hungarian banking sector is generally robust and from an accounting perspective the interest income that remains uncollected does not constitute a loss. The moratorium will not result automatically in a loss of capital for banks, also due to the compound interest and the opt-out right of clients. In addition, the Hungarian National Bank announced that it is taking measures to support liquidity of banks. It is also envisaged that the lending activity of the banks will drop radically, which in turn means that the fee and commission income of the banks will drop as well, and their capacities will turn to servicing the existing increasingly problematic loan portfolios. Also, the Hungarian banking sector invested heavily in digitalisation and that may ease some difficulties encountered from an operational perspective.
All in all, although the banks may not expect a profit as high as last year (or might even suffer losses), the Hungarian banking sector is in good shape and thus the financial stability of the sector is not threatened by these measures.
By Gergely Szaloki, Partner, and Virag Palguta, Associate, Schoenherr