Spain’s Banks Use Covid Loans to Move Risk Off Their Books

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Spain’s banks are using a government loan program designed to help small businesses ravaged by the coronavirus outbreak to shift risky credit off their books, a study found.

About 37% of loans granted under the program to small- and medium-sized companies in Catalonia went to paying down old debt, according to a survey by Pimec, an association that advocates on behalf of such businesses in the region. Most of the country’s large banks were following that practice, led by Banco Bilbao Vizcaya Argentaria SA and Banco de Sabadell SA, said the study, which is based on responses from 432 companies.

BBVA didn’t immediately provide comment. Sabadell wasn’t immediately available for comment.

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Some lenders are telling companies they must use government-backed loans to pay off existing credit lines in order to get access to new financing through the crisis program, the study showed. The practice threatens to undermine the the goal of quickly getting liquidity to companies so that they can survive one of Europe’s strictest lockdowns.

If it continues, “this initiative will not increase liquidity,” Pimec president Josep Gonzalez told journalists. “It could mean that the funds that the government is destining to this program would be insufficient to respond to the decline in economic activity.”

BBVA, Sabadell

Economy Minister Nadia Calvino has said that using state-backed loans to pay down existing debts isn’t allowed under the program. A ministry spokesman said government officials and Spain’s central bank are closely monitoring the program.

Prime Minister Pedro Sanchez pledged in March that Spain would back as much as 100 billion in loans to companies. So far the government has approved three tranches of about 20 billion euros for loans that are backed by the Institute of Official Credit, or ICO. The country guarantees 80% of loans to small and mid-sized companies, and 70% of loans to large corporations affected by the crisis.

While most of Spain’s major banks appear to use the program to have old loans paid down, some have done it more than others. The poll found that 79% of loans through BBVA were used to pay off existing loans. For Sabadell, the proportion was 62%, for Banco Santander SA it was 40% and for CaixaBank SA 11%.

CaixaBank declined to comment. Santander didn’t immediately provide a comment.

One company in Barcelona that manufactures capital goods was asked by its bank to to take out a 36-month credit facility of 150,000 euros to pay down an already existing loan it held with the bank, according to Pimec. It was one of the conditions the lender extended before offering a new 60-month loan of 100,000 euros through the government scheme. The company asked not to be identified because it feared being blocked from access to future credit by the bank.

In some cases, the banks have used the ICO loans to pay off existing credit lines rather than loans, according to several companies interviewed by Bloomberg.

Conditions

One bank customer was told that the ICO loans allowed for their existing credit facility that their transport company uses to pay bills to be refinanced as an ICO loan it wasn’t a loan. They persuaded the person to take out a loan of about 55,000 euros to pay back an equivalent amount they had drawn down on the credit facility. They were also granted an additional loan of 12,000 euros to cover expenses during the lockdown.

Javier Lamban, president of the region of Aragon, raised the issue with Prime Minister Pedro Sanchez during a video conference with Spain’s regional leaders on May 3, according to a statement by the government of Aragon. He complained of a “perverse practice” by banks in which they are “refinancing previous loans that have nothing to do with the consequences of coronavirus,” the statement said. Lamban’s press office clarified that he was referring to the practice of using the ICO credit facilities to pay off existing loans.

The practice of refinancing means banks are eating into a finite pool of available credit for SMEs. Spain is already lagging behind European peers in terms of the aid its able to offer businesses. The 100 billion euros in guarantees represents about 9% of Spain’s economy. Other countries have offered comparatively more. Italy has pledged to back loans for an equivalent of 32% of its gross domestic product, Germany is offering 23% and France an equivalent of 14%.

Spain’s businesses are going to need as much help as the can get. The Covid-19 outbreak has hit Spain hard, killing more than 25,000 people and prompting one of the strictest lockdowns in Europe. The country may have lost almost four months of normal activity by the time the lockdown is completely lifted in late June.

Some applicants have resisted suggestions by their banks to transfer their existing debt onto the government program. One Banco Santander SA customer said the lender wanted them to take out a 50,000 euro loan to pay down the debt they had on a credit line with the bank as a condition for being granted an additional 50,000 euros of credit. The person refused and instead got an extension on the existing credit line to 65,000 euros and an ICO loan of 40,000 euros.

Spain’s antitrust regulator CNMC is already investigating whether some banks have pushed applicants for state-backed loans to buy other financial products such as life insurance as a condition for selling them the loans.

Banks have also raised borrowing costs. The BBVA client’s loan was sold at an interest rate of 3.5%, double what the government suggested banks should charge when it announced the program. The interest they’ll pay over 5 years on the ICO loan is in addition to the 1.75% commission already paid on the credit facility.

— With assistance by Jeannette Neumann, and Rodrigo Orihuela

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