Dáil Éireann Debate, Tuesday - 14 July 2020
279. Deputy Johnny Guirke asked the Minister for Finance if banks have continued to accrue interest on accounts availing of the Covid-19 repayment holiday period without an obligation to do so; the measures he plans to take to motivate and incentivise banks to reimburse such interest to customers; and if he will make a statement on the matter. [15880/20]
View answerThe Members of the Banking and Payments Federation of Ireland (BPFI) introduced the payment break for their customers on 18 March last to provide relief for people whose income had been affected by the Covid-19 crisis. The scheme was introduced in advance of the EBA guidelines of 2 April 2020.
The guidelines stated the following in paragraph 24:
"The moratorium changes only the schedule of payments. This condition is consistent with the objective of the moratorium to address the systemic short-term liquidity shortages. In order to achieve this objective, the moratoria suspend, postpone or reduce the payments (principal, interest or both) within a limited period of time. This clearly affects the whole schedule of payment and may lead to increased payments after the period of the moratorium or an extended duration of the loan. However, the moratorium should not affect other conditions of the loan, in particular the interest rate, unless such change only serves for compensation to avoid losses which an institution otherwise would have due to the delayed payment schedule under the moratorium, which would allow the impact on the net present value to be neutralised."
Banks across Europe interpreted the above paragraph in different ways with the results that different schemes were introduced. Some countries provided for the accrual and capitalisation of the interest. Others provided for the non-accrual of interest and a number of countries provided for accrual of the interest but not its capitalisation. As the Deputy is aware, the payment break introduced by the BPFI does provide for the accrual of interest.
Subsequently, in its letter to Deputy Doherty on 22 June last, the Central Bank stated that the EBA was expected to provide further clarity on the specific issue of interest accrual and it outlined that both net present value (NPV) neutral and NPV negative solutions are possible. The Central Bank also informed Deputy Doherty that the scheme introduced by the BPFI is acceptable within the context of the EBA guidelines.
In its implementation report published on 7 July, the EBA stated that the report "provides clarification on questions raised in the context of the EBA's monitoring of the implementation of Covid-19 policies".
A key clarification is that:
" There may be a decline in the NPV if the obligor makes use of the moratorium and postpones one or several payments and no interest is charged for the time covered by the moratorium. Alternatively, the moratorium may be NPV-neutral (i.e. no change in the NPV) if subsequently at least one of the instalments is adjusted upwards or added."
Finally, the Deputy should note that the Central Bank instructed lenders that customers applying for a payment break must be fully informed about the implications. This means that lenders should outline if the repayment term of the mortgage will be extended due to the payment break, if monthly payments will increase following the resumption of the mortgage repayments, if interest will continue to accrue during the payment break and the implications this will have for the total cost of the credit, and any other significant matter for the customer when availing of a Covid-19 payment break. This was done to ensure that borrowers could make fully informed decisions about whether or not to proceed with a payment break.
