The role of banks in the pandemic
By Piyush Gupta, CEO, DBS Bank
As I pen this, the Covid-19 pandemic continues to roil the world - the global death toll has topped 160,000, entire economies are at a standstill, mass unemployment is a very real prospect, and the hope of a vaccine remains at least a year out.
To cushion the economic impact, governments have launched fiscal bazookas exceeding US$10 trillion (S$14.2 trillion) and central banks have reopened liquidity taps. While the immediate priority is rightfully on saving lives, these unprecedented actions recognise that the protection of jobs and livelihoods is no less important.
Amid this maelstrom, the role of banks has come under the spotlight in recent weeks, with the reasonable expectation that they should step up to provide financial succour to the needy in these difficult times.
As an example, both the European Central Bank and the Bank of England have asked banks to suspend dividend payouts and share buybacks, and to prioritise funding to households and small businesses instead.
While the prescription on dividends might be premature (given most banks are significantly better capitalised than a decade ago, and can still pay dividends without compromising their ability to lend, as noted by the US and Asian regulators), I believe there can be little debate around the principle.
As constructive members of society, financial institutions have an integral role to play in supporting real people, real lives, real economies, and to share the pain in a downturn.
This is why Singapore banks have been active on a number of fronts, and our actions can be distilled down to the following points:
1. PROVIDING CASH FLOW SUPPORT
Governments implementing lockdowns mean businesses and individuals are being starved of income.
Expenses, however, still have to be met. With money not coming through the door, cash flow has become the single biggest need. This is particularly true of individuals and small and medium-sized enterprises (SMEs), which may not have the reserves that large companies do.
Since the biggest cash outflow for individuals or SMEs tends to be for a mortgage or some other loan, banks have announced moratoriums on interest and/or principal payments until the year end.
In recent days, DBS has had over 8,000 requests for mortgage relief in Singapore and moratoriums on almost $1.6 billion of SME loans.
2. LOWERING THE COST OF LENDING
One way banks have done this is to allow eligible customers to convert credit card loans, which draw annual interest in the 20+ per cent range, to a term one where the effective rate is capped at 8 per cent.
3. PROVIDING NEW KINDS OF LENDING TO MARGINAL BORROWERS
The Government has stepped in to cover risk up to 80 per cent to 90 per cent of some SME loans. This improves dramatically a bank's ability to give a loan to the marginal borrower.
DBS has already approved over 1,200 loans worth over $1 billion under this programme.
4. HELPING CUSTOMERS DO THEIR BANKING DIGITALLY
This has become imperative during the circuit breaker period when companies outside of essential services must facilitate full telecommuting. With employees working from home, it makes no sense to still have to go to the branch to carry out banking transactions.
The "contact-free" trade financing digital capabilities we introduced in February allow corporate customers to conduct 11 everyday trade financing solutions such as applying for letters of credit online. They had to be done at trade counters or branches previously.
The banks have assured employees that there will be no layoffs arising from Covid-19.
At DBS, we are doing what we can to ensure everyone receives full pay even if, for a while, we need fewer resources than normal in areas such as our branches. Emphasis has also been placed on ensuring the mental health of our people amid work-from-home arrangements.
I was recently asked about how far a bank's social responsibility extends, insofar as the pandemic goes. How should we balance our obligation to shareholders and other stakeholders, including employees, customers and society at large?
At the heart of this question is the debate between the virtues of "shareholder capitalism" and what is increasingly referred to as "stakeholder or conscious capitalism".
The shareholder school posits that a corporation's role is to maximise shareholder value, while other societal goals should be left to agencies like investors or the Government, which are better suited to that role.
I believe there are deeper underlying questions that this view begs. For example:
- Are corporations independent entities with obligations of their own, independent of shareholders?
- Are governments adequately equipped to address some of the knotty, transnational problems faced by the world?
- Is there really a conflict between the interests of shareholders and those of other stakeholders?
The fact is that corporations are "living beings" for all intents and purposes and have an obligation to the common good, just as all other living beings. This requires them to look after the interests of employees and customers, as a start. It also places an obligation to address other community imperatives as part of their charter.
The scale of the pandemic is such that it cannot be left to governments to find resolution on their own. And the truth is that private sector corporations are some of the biggest actors on the world stage, and have an ability to carry influence across borders.
There is also no real conflict between shareholder and stakeholder interests.
The issue is one of timeframes. While there may be some trade-offs between maximising shareholder returns and providing societal benefits in the short term, addressing broader issues in society is completely consistent with shareholder interests in the long term.
The economic impact of Covid-19 will be long-lasting, and my hunch is that it will take us into the fourth quarter before we see any meaningful revival of activity. The reason it will take so long is that it is not easy to start turning on the engine for the global economy.
In China, while 90 per cent to 95 per cent of employees are now back at work, factories are operating at only 50 per cent to 60 per cent of capacity. This is because demand has collapsed in the West and export-oriented industries will see operations return to normal only when there is a synchronised recovery globally.
To get the economic engine revving quickly, we have to ensure that when demand returns, SMEs can quickly activate their businesses. This means giving them the wherewithal to weather the next few quarters; to keep workers on the payroll and supply chains intact.
The liquidity, lines of credit, and support that banks are giving serve to protect jobs and markets.
In a crisis, everyone has a role to play. Governments are pitching in, taxpayers are pitching in, banks are pitching in, shareholders have got to pitch in. As responsible members of the community, there are no two ways about it.
Source: The Straits Times © Singapore Press Holdings Limited. Permission required for reproduction.