Special Analysis: Bank Credit and Interest Rates during the Coronavirus Crisis
Following are several main points on credit and interest rates in the banking system in recent weeks, as seen in data collected by the Banking Supervision Department:
The change in scope of credit
- Since the outbreak of the crisis, during March, the banking system extended approximately NIS 24 billion, net, of credit, a notable monthly increase of 2.3 percent (28 percent in annual terms), compared with a monthly average of only NIS 2 billion in January and February 2020. The increase was seen at all five large banks in the system.
- The main growth in credit was to commercial and business borrowers at a scope of NIS 21 billion (a monthly increase of 5.6 percent, meaning an increase of 67 percent in annual terms). About 30 percent of the new credit to commercial and business customers was extended based on the utilization of credit facilities extended to those companies before the crisis. The rapid growth characterized all of the 5 large banks in the system.
- In terms of mortgages, the balance (after repayments) increased by NIS 5 billion, with total mortgages granted in Israel in March totaling about NIS 9 billion (the highest in recent decades). This credit also includes consumer credit for any purpose secured by a residential property, based on the easing that the Banking Supervision Department allowed as a temporary provision during the crisis period.
- There was a decline in consumer credit of about NIS 1 billion (a monthly decrease of 0.7 percent, or about 8 percent in annual terms). The decline in consumer credit was not characterized by all the banks, and in some of them there was an increase in the scope of consumer credit. A considerable part of the decline derives from repayments of credit that had been extended previously, in a period when part of the banks greatly increased their credit to the consumer sector.
- In credit to small businesses, there was a decline of approximately NIS 900 million (a monthly decline of 0.8 percent, meaning about 10 percent in annual terms). We emphasize that the updated government-backed fund for businesses was only launched on March 31, so its impact is expected to be seen only in the coming months.
- The government announced an $80 billion economic plan, similarly sized, in terms of percent of GDP, to plans announced by other governments. Almost half of it is made up of financing facilities and deferral of payments that provide cash-flow assistance to businesses that are negatively impacted, in order to smooth over time the adverse impact to income. However, there is a notable difference in the share of government guarantees to funds for credit to businesses in Israel compared with other countries (see figure). A higher share of government guarantees will enable the banking system to extend bigger loans, to a wider population, and in particular to small businesses, while maintaining appropriate underwriting.
The change in interest rates
- In general, the average price of credit in the last week of March (the height of the crisis so far) remained unchanged compared with prices of February 2020, prior to the crisis.
- The average interest rate on consumer credit in the last week of March declined by about 0.1 percent to about 4.9 percent. However, note that wide variance among the banks can be seen in this area.
- The average unindexed shekel interest rate on housing credit (mortgages) in the last week of March remained unchanged from February (2.5 percent). With that, the interest rate in the CPI-indexed shekel track increased by about 0.2 percent, to 2.8 percent. Note that most of the loan volume in March is based on an interest rate locked in for 24 business days from the period prior to the crisis.
- Due to the increase in the cost of raising resources by the banking system, in particular long-term sources, and in view of the increased risk in the economy, the banking system’s credit margin, in particular in the mortgages segment, declined (in view of the cost of raising resources that became more expensive).[1
- The average interest rate on credit to small businesses was essentially unchanged in the last week of March, at 5.14 percent.
- The average interest rate on credit to commercial and large companies increased slightly in the last week of March, compared with February, by 0.12 percent, to 2.5 percent.
- The Banking Supervision Department was updated that recently the banks have offered loans at higher prices in the various segments, some of which were not executed and therefore do not appear in the average data presented in this document. For example, the assessments based on data from the last few days indicate an increase of 0.7–1.0 percent in the interest rate on mortgages.
- Accordingly, on April 3, the Banking Supervision Department sent a letter to the heads of the banking system with the expectation that banks will enlist to assist the economy to get through the crisis by increasing credit, with an emphasis on small businesses and households, and fair pricing of loans, even with some negative impact on the banking system’s profit margins. In addition, we note that the Bank of Israel is working, among other things, in the government bond market, which should also lead to a decline in the cost of resources of the banks, which should trickle down to consumers. Accordingly, we urge the public to return to the banks and request revised quotes that should reflect the above.
Deferral of payments for borrowers (due to the coronavirus crisis)
- During March, the banking system deferred, for about 200,000 of its customers, payments totaling NIS 3.3 billion.
o The balance of the payments deferred in actuality for small businesses is about NIS 1.1 billion.
o The balance of the payments deferred in actuality for mortgage borrowers is about NIS 1.1 billion.
o The balance of the payments deferred in actuality for business borrowers is about NIS 700 million.
o The balance of the payments deferred in actuality for consumer borrowers is about NIS 370 million.
 For an expanded discussion please see the analysis published by the Banking Supervision Department on March 30, 2020, that deals with the development of credit prices.