COVID-19, the infectious disease, has not only infected people but also the financial sector of the country. The impact of coronavirus on the financial condition is quite severe, contributing to the fall of demand, production shutdowns, and lower incomes. Thus, financial institutions across capital markets and the banking sector must prepare themselves for the new normal. Although there is a significant impact on all the aspects of the financial sector, the most impact has fallen on the loan arrangement aspect. Therefore, we have discussed some points for proper understanding of the matter.
How COVID-19 has changed the loan agreements
The following are the points that explain the effects of the pandemic on the economy and our society. It will help in taking the precautions to adjust ourselves for the new normal.
Interest and capital payments
The financial companies offer capital payment and interest deferrals, pushing back the loan terms and extending the grace period according to the need. Also, they are extending new lines of credit to capitalize interest and principles or interest payment. Nowadays, these flexible approaches are tailored, keeping in mind a certain set of circumstances to treat customers fairly. In addition, communication is given importance to build no gap between the lenders and borrowers.
When the outbreak first began, it made it very challenging for the banks to gain a proper valuation of the property. As a result of the uncertainty, the lenders started valuing their property on assumptions and provided caveats to the valuation, basing it on material valuation uncertainty. So, the clients, when seeing this understood, it has been made under extraordinary circumstances. However, after the easing of lockdown, the positive movement has been seen.
As borrowers are very reliant on the income of the commercial tenants, the impact of the pandemic has been a lot on the tenants. However, they received a good degree of protection from the government in relation to claim unpaid rent. Finally, when we moved past the lockdown, when the shops re-opened, the long-term affordability of the financial institution improved.
Material adverse change MAC
Most loan agreements included several events of default where the person lending the loan believes it to be MAC circumstances. It is a very serious event, so the lenders always proceed with caution whenever calling for a MAC event of default. So, while the lenders are unwilling to call a MAC event of default, they are also not willing to grant a special waiver of the MAC clause. The clause specifies the borrower certainty that the event will not be called because of the COVID situation.
Prepayment of insurance amount
Business interruption is the talk of the town for the past three months, with some of the claims paid and others not. Thus, several loan agreements came up with the rule of mandatory prepayment proceeds, which stated that any insurance amount over a certain limit must be used to pay down the loan. However, the actual result of the agreements will vary depending on the communication, circumstances, and flexibility.
Financial institution all around the globe is constantly monitoring and dealing with the effects of the pandemics. They are keeping track and working on it to benefit themselves as well as the society and economy as a whole. For this, experts are giving their views, and the customers are making a good decision. It is important because when everyone works together, then only conditions will be better.