Italy banks ask for bad loan truce as coronavirus hits the economy

By Stefano Bernabei

ROME (Reuters) - Italy's banking lobby is asking European authorities to ease rules on problem loans for at least six months, as a coronavirus outbreak hits the economy and throws the fragile sector's recovery off course.

Europe's worst flare-up of coronavirus is expected to have pushed Italy into a new recession as measures to prevent the spread of the virus cripple economic activity, threatening an increase in the number of bad loans that Italian banks have worked hard to reduce in recent years.

Italian credit rating group Cerved has warned default risks could double among smaller businesses if the crisis lasts through the year.

To cushion the impact, leading Italian banks are offering a grace period on payments owed by companies hit by the virus, which is causing disruptions in supply and distribution chains, staff shortages and order cancellations.

But this risks backfiring due to rules that force banks to class a borrower as in default after an even partial payment delay of more than 90 days, or if the person is deemed unlikely to repay their debt without actions such as foreclosures.

Such rules are already in place for lenders that use an advanced internal model to assess client risks. Banks using standard models will have to comply from 2021.

"It's essential that European Authorities consider providing temporary relief to banks," Italian banking association ABI Director General Giovanni Sabatini told Reuters.

ABI is working in Europe to convince authorities a reprieve is necessary. Without it, Sabatini said, Italian banks would be forced to set aside funds to offset the bad loans - eating into precious capital buffers.

"They would be ... discouraged from granting forbearance measures," he said.

Sabatini said banks would only suspend payments due from healthy companies facing temporary liquidity issues and this would not be a way to sweep future loan losses under the carpet.

In a painful restructuring process after a deep recession, Italian banks have shed 200 billion euros in bad debts, reducing them to 8% of total lending, down from a 2016 peak of 18% but still above a 5% European guideline.

Sabatini said ABI viewed the best solution as a Europe-wide guarantee scheme that would allow lenders to set aside less capital when providing relief measures to firms whose business is suffering due to the coronavirus.

"EU authorities might consider relaxing for six to 12 months the more stringent rules on non-performing exposures, he also said, referring to both a new definition of default and new rules requiring a full writedown of impaired loans over a set period of time.

This latest set of rules, known as calendar provisioning, kicked in last April.

(Reporting by Stefano Bernabei, editing by Valentina Za, Kirsten Donovan)