On Loan Payments Amid COVID-19

SAID THE LAW:

The moratorium applies to all lenders, whether public or private, including banks, quasi-banks, non-stock savings and loan associations, credit card issuers and pawnshops, irrespective of their place of operation. All types of loans with principal and/or interest falling due during the ECQ period are covered. These include loans that have been extended to individuals, households, micro, small and medium enterprises (“MSMEs”), corporate borrowers and other parties.

The mandatory extension allows debtors to repay their loans after the quarantine period. This means that there will be no interests on interests, charges, fees, or penalties that will be added on to the loan because of the delay. Note that the prohibited interest refers to the charge or fee for default payment. It does not refer to the interest which constitutes as payment for the service of lending money. The latter will remain due and payable after the ECQ period.

The 30-day grace period is automatically extended if the initial ECQ period is extended by the government.

However, the Bangko Sentral ng Pilipinas clarified that once all cities and provinces are placed under a General Community Quarantine (“GCQ”), the mandatory grace period will then be lifted. A more definitive guideline has yet to be issued in light of the staggered classification of community quarantine levels in different areas of the country.

After the ECQ period, borrowers are given the option to pay the accrued interest either in full or on a staggered basis over the remaining life of the loan. In this manner, it helps reduce the economic impact of COVID-19 crisis at the end of the lockdown period. This provision also foresees and tries to address the hurdles of MSMEs for lack of working capital when they relaunch operations post-ECQ.

Postponing the repayment of loan for a month or so could mean  extra breathing space for individuals and MSMEs alike. For individuals, it may mean that the extra funds could be budgeted for the basic needs of the family in these trying times. For MSMEs, this temporary relief could mean extra cash flow that could be re-allocated to support their resumption of economic activities and to counter prevailing headwinds.

Note, however, that the legislated grace period only serves to suspend the collection of amounts due. It does not condone the debt. It is therefore important to carefully plan and allocate resources available during lockdown so that resumption of loan repayments once they fall due post-ECQ period will not be much of a problem.

Inevitably, there will be a rise in collection cases after the ECQ period and it remains to be seen whether the government would impose stricter measures to prevent unfair debt collection practices while dealing with immediate impacts of the crisis after the lifting of ECQ.

The lenders, on the other hand, should exercise caution in their collection efforts. While they are expected to support their customer borrowers at this difficult period, they must look after the viability of their businesses as well. It is thus important as always to exercise responsible lending practices and ensure that loan documents are carefully vetted. For recording purposes, the legislated grace period should be recorded in the debtor’s account to avoid calculation errors of the amount due when it is time to collect payments again.

The key takeaway is that the mandatory grace period is not a condonation of the loan, but only a postponement of the obligation to make payments, which were otherwise due, within the ECQ period. If availed of prudently, individuals and businesses stand to benefit from this legislative measure, albeit temporarily.

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