Central Bank publishes research examining the impact of Covid-19 on borrowers and businesses

• Behind the Data finds significant forbearance granted to businesses; in particular the real estate, accommodation and food, and arts and recreation sectors.
• Research Technical Paper indicates that as the economy recovers, most SMEs suffering Covid-related distress are likely to be viable, but may require continued liquidity financing.
• Explainer video and FAQs provide important information to SMEs and mortgage borrowers experiencing financial difficulty.

The Central Bank has today (13 December 2021) published a Behind the Data (BTD) and Research Technical Paper (RTP) that examine the impact of Covid-19 on borrowers and businesses.

A number of resources for mortgage and SME borrowers experiencing financial distress have also been published. These resources include an explainer video for SMEs and updated FAQs for SMEs and mortgage borrowers. The explainer provides an accessible overview of the SME Regulations, which regulated firms must follow when managing financial distress for SMEs. The updated FAQs for SMEs and mortgage borrowers explain the protections that apply to borrowers experiencing financial distress.

The Behind the Data, “Forbearance during the Covid-19 crisis in 2021: Who has needed lenders’ support?”, authored by Stephen Sweeney and Allan Kearns, looks at loans granted forbearance between December 2020 and September 2021. It finds that retail banks issued forbearance to borrowers on €4.7bn of loans during this period; 79% of which was to businesses. This represented 12% and 10% of banks’ outstanding corporate and SME loans, respectively.

Sectoral data show that the crisis has mostly affected the Real Estate, Accommodation & Food service, and Arts, Entertainment & Recreation sectors. These sectors account for 83% of forbearance granted to businesses during the period. The data indicates that some borrowers, who had initially returned to the original repayment schedule following a payment break, have subsequently needed new forbearance supports in 2021.

These findings are complemented by a RTP also published today. “SME Viability in the Covid-19 Recovery”, authored by Fergal McCann, Niall McGeever and Fang Yao, uses survey data from a representative sample of SMEs to consider the implications of the economic recovery for the financial health of small businesses in Ireland. The Paper uses economic forecasts to develop scenarios out to 2024. Using this modelling, the research finds that financial distress among firms is expected to fall from a peak of 12% in 2020 to 7% by 2024. It further finds that, in the absence of direct government financial supports, 15% of firms would have been financially distressed during the pandemic, and potentially up to 30% if SMEs had been obliged to meet all operating losses using only pre-existing cash balances.

The Paper finds that there is a clear distinction between pre-pandemic distress and the temporary distress incurred in 2020. More specifically, it finds that the majority of firms that are expected to remain distressed at the end of the scenario window are those that were distressed before the start of the pandemic. This is a cohort of 5-6% of SMEs. Due to the strength of the forecasted recovery and the design of support policies, the Paper finds that the withdrawal of government supports will not adversely affect a large cohort of firms. However, in the event of a partial recovery only, sustained loss-making may over time lead to elevated levels of distress in certain SME sectors (e.g. retail and hospitality sectors).

Further, the Paper notes that the SME sector is vulnerable to any change in the availability of external financing. This will provide an important bridging function as viable SMEs continue to require temporary liquidity support during the recovery. Should there be a tightening of external financing, the research suggests financial distress in 2024 could increase from 7% to 13%. This finding highlights the importance of an adequate provision of liquidity financing from lenders to ensure that viable but challenged SMEs can trade through the recovery from the unprecedented shock related to the pandemic.

Commenting on the research, Central Bank Deputy Governor Sharon Donnery said, “The research published today underlines the scale of the difficulties faced by businesses and borrowers during the Covid-19 pandemic. While there are signs of economic recovery, the current outlook - as evidenced by the emergence of the Omicron variant - reinforces the fact that significant uncertainties remain.

“The issue of distressed debt remains a key focus for the Central Bank. We expect regulated firms to continue to support viable businesses and borrowers through the challenges posed by Covid-19. It is critically important that lenders reappraise themselves with the expectations outlined in our Dear CEO letter of November 2020. These expectations are as relevant today as they were then. The survival of viable businesses, who have faced challenges during the pandemic, is critical for employment and the overall health of the economy.

“We encourage any borrower experiencing financial difficulty to engage with their lender as early as possible. Strong protections are in place to support borrowers during times of distress, and the resources we have published today, including a new Explainer video for SMEs, provide guidance to mortgage borrowers and businesses.”