14th April 2020

COVID-19: Banking and Finance implications

We have prepared an overview of current issues in relation to ongoing measures.

What specific measures has the Czech National Bank (CNB) adopted? 
Trading of the Czech National Bank on open market: The government approved a draft amendment to the Act on the CNB aimed at making the implementation of monetary policy more flexible. 

The draft amendment widens the range of ounterparties (e.g. insurance companies, securities brokers, investment funds and other counterparties conducting business on the capital markets) with which the CNB may trade. Also, it is proposed that the range of instruments with which the CNB may trade widen to all investment instruments, precious metals, receivables and other assets. The draft amendment is subject to approval of the Parliament. 

Further cutting of interest rates: As of 27 March 2020 the two-week repo rate was cut to 1.00 %, the Lombard rate to 2.00 % and the discount rate to 0.05 %. The CNB is ready to cut interest rates further. 

Decrease of countercyclical capital buffer: As of 1 April 2020, the CNB decreased the countercyclical capital buffer from the current level of 1.75 % to 1 %. If an unexpected rise in losses in the banking sector occurs, the CNB is ready to release the countercyclical capital buffer completely. 

Exchange rate fluctuations: The CNB announced that it stands ready to react to any excessive fluctuations of the koruna using its instruments, in line with the managed float exchange rate regime. 

Relaxation of credit ratio limits: With effect from 1 April 2020, the CNB Bank Board has relaxed its recommendations for the assessment of new mortgages: 

Ratio LTV (Loan-To-Value), i.e. the ratio of amount of indebtedness of the client in relation to a retail loan secured by residential real estate and the value of collateral, has been increased from 80 % to 90 %. 

Ratio DSTI (Debt Service-To-Income), i.e. the ratio of average annual spending in relation to overall indebtedness of the client and amount of his annual income has been increased from 45% to 50%. 

As for ratio DTI (Debt-To-Income), i.e. the ratio of overall indebtedness of a client and amount of his annual income, the CNB has cancelled its recommendation to the banks to assess the client pursuant to this ratio; from now on, they should only monitor this ratio. As a result, applicants for mortgages will have with the same value of real estate serving as a security and the same level of income a chance to obtain a higher amount of mortgage than before. Mortgage providers have an option to overstep the above mentioned LTV and DSTI ratios in case of loans being provided in a current calendar quarter representing 5 % of reference volume. 

A regulation of postponement of consumer and commercial loan instalments is being considered in the surrounding European countries. Are there any similar initiatives in the Czech Republic? 

Postponement of loan and mortgage instalments (so-called “loan moratorium”): The government approved a draft law that shall enable debtors (both consumers and entrepreneurs) to postpone their loan instalments for a maximum of 6 months. The proposal would regulate loans provided by banks and other regulated subjects as well as loans provided by non-banking loan providers. The draft law is subject to approval of the Parliament. 

Duration of postponement period: A loan moratorium will be introduced, which will last from the first day of the calendar month following the day on which the bank or other creditor received the relevant debtor's notice, by which the debtor expresses his interest to postpone the instalments until 31 October 2020 or 31 July 2020 (in case the debtor wishes to use a shorter period).  

Types of loans: The moratorium period will be in general relevant for loans agreed and drawn down prior to 26 March 2020 and loans agreed prior to 26 March 2020 if these are mortgages and other purpose loans for the acquisition, settlement or retaining of rights to real estate, construction, redesign of a building, etc. On the other hand, it is not possible to apply the moratorium in relation to e.g. an operating lease, revolving facility, loan for investment instruments trading or loan hedged by term operation on financial market. However, a possibility of instalments postponement will not be given to debtors who were as at 26 March 2020 in delay with payment of their monetary debt for more than 30 days. 

Opt-in: The debtor will have to notify the credit provider that he intends to use the moratorium via written notification. Banks and other creditors will be obliged to indicate an easily accessible manner for sending such notification and use means of distance communication (e.g. an internet banking interface). Neither the banks nor other creditors will be allowed to require any fees for actions in relation to use of the moratorium. An intention to use a shorter period of moratorium, i.e. until 31 July 2020, will have to be included in the notification. 

Effects of the moratorium period: 
 Maturity of monetary debts under a loan agreement (i.e. interests as well as principal) and period for which a security for the loan is provided is prolonged by the length of the moratorium period. 

 Interest rate during the postponement period will be capped at the repo rate plus 8 percentage points (so, currently at 9 %), if no lower interest rate was agreed. However, for entrepreneurs the originally agreed interest rate will apply. 

 Concerning maturity of interests for natural persons, if a one-time repayment is agreed, the interest arising during the moratorium period will be paid at once at the time which will be determined by instalment postponement during the moratorium period. In case a repayment in instalments was agreed with a natural person, the amount of instalments would not change, and the duration of loan period would be amended accordingly. However, the legal entities would be 
obliged to pay the interest in the amount and dates as originally agreed. Nonetheless, creditors and debtors will be allowed by law to agree on different terms of maturity. 

 Consumers or natural persons (e.g. natural persons-entrepreneurs) will not be obliged to pay any payments on an ongoing basis agreed in the loan agreement other than an interest (e.g. fee for maintenance of a credit account). However, the legal entities will be still obliged to pay such fees. 

 Period of the fixed interest rate will be extended by the length of moratorium (in practice, e.g. in case of use of the moratorium of 6 months, a 5-year fixation of interest rate for a mortgage will become 5 years and 6 months long). 

Prohibition of payments in relation to delay of debtor: Also in case a debtor does not use the option for instalments postponement, the banks or other creditors will not have right to payments agreed or determined for the case of delay of a debtor arising under a loan agreement (e.g. default interest) since the first day of the first calendar month following the day on which the draft law becomes effective until 31 October 2020. This rule will not apply to the debtors being legal entities. 

What are possible impacts of the pandemic on existing loan agreements? 
Higher frequency of occurrence of events of default: Deterioration of the economic situation of a debtor in most affected fields of activity is being manifested by various forms of breaching of loan agreement, e.g. delay in payments of principal or interest, breaching financial covenants, threating insolvency or activation of provisions regarding “material adverse effect” or cross-default. Possible impacts could occur on provision on roll-over or revolving financing, mainly if it is linked to proper performance of the loan agreement or absence of MAE. In case your business activities are significantly 
affected by the pandemic, we recommend that you contact your bank or other creditor and start negotiations regarding possible amendment of the conditions of the loan or its restructuring. 

Are there any accessible forms of state aid? 
Programs of Czech-Moravian Guarantee and Development Bank (CMZRB): The Czech-Moravian Guarantee and Development Bank created support programs COVID I and COVID II. The acceptance of applications for COVID I, which allowed applying for an interest-free operating loan in the amount of CZK 500,000 to CZK 15 mil, has been paused as at 20 March 2020. Currently, the applications are being processed. The CMZRB has launched acceptance of applications into the guarantee program COVID II on 2 April 2020 and as a result of high interest of applicants, it has prolonged the period for acceptance of applications until midnight 3 April 2020. 

Forms of aid within the program COVID II: Issuance of a bank guarantee in the amount of up to 80 % of the principal of a guaranteed loan of up to CZK 15 mil. with the term of the guarantee being maximum 3 years and provision of financial contribution for payments of interests for the guaranteed loan (varying according to the amount of guaranteed loan). 

Eligible applicant: Small or medium-sized entrepreneur conducting business activities in the determined fields (such as manufacturing, construction, the lease and administration of owned or leased real estate, wholesale and retail trade, accommodation, administrative and support activities, activities related to employment, services to buildings and landscape activities, etc.) that fulfils further criteria (e.g. absence of insolvency and unpaid debts etc.). 

Underlying agreement: The applicant must enter into a loan agreement with a bank cooperating with the CMZRB (e.g. Raiffeisenbank a.s., Česká spořitelna, a.s., Oberbank AG and others). 

Purpose of the guaranteed loan: The purpose of the loan must be only to cover operational costs of the receiver of aid directly connected with overcoming the situation caused by the spread of the coronavirus and paid for a project outside of Prague. 

If you are currently facing any of the above described issues or have any other questions connected to the current situation, please do not hesitate to contact us. We are at your disposal. 

Mgr. Ivana Meňhartová 
Partner, Taylor Wessing Praha 
Tel: +420 224 81 92 16 

Ing. Mgr. Ivana Taškárová 
Senior Associate, Taylor Wessing Praha 
Tel: +420 224 81 92 16 

Members of the American Chamber of Commerce in the Czech Republic