As a key intermediator between federal funds and small businesses, the commercial banking industry is processing substantial volumes of loan applications as small businesses seek relief from COVID-19 disruptions. The key portion of the Coronavirus Aid, Relief, and Economic Security (CARES) Act affecting banks is the $349 billion Paycheck Protection Program (PPP). The PPP is a US Small Business Administration (SBA) funding program that guarantees loans that incentivize small business with fewer than 500 employees to maintain payroll. The program is designed to curtail mass unemployment and better prepare the economy for a swift recovery. The loans are for a term of two years with an interest rate of 1.0%.
Affected industries within the PPP
The PPP is expected to directly affect the following lending industries: Commercial Banks, Credit Unions, Regional Banks and to a lesser extent, the Peer-to-Peer Lending Platforms and Savings Banks & Thrifts. Moreover, the SBA specifically designates businesses within the Accommodations and Food Services sector as eligible applicants. IBISWorld expects a large portion of SBA funding to be directed to the Retail Trade sector as well. Overall, the industry effects of the PPP and other SBA programs will be to the combined benefit of both lending industries and small-business-oriented industries.
The most significant effect on the Finance and Insurance sector that the CARES act has had is the drastic hold or tempering of financial regulation. The CARES act provides numerous provisions temporarily easing lending limits, leverage ratios and delaying compliance deadlines to facilitate speedy lending. In particular, the CARES act eases the requirements of classifying loans as Troubled Debt Restructurings (TDR), effectively permitting banks to allow borrowers to skip, defer or change the due date on loan payments.
Additionally, the CARES act has delayed mandatory implementation of the Current Expected Credit Losses (CECL) methodology. The factor of speed is what makes this relief effort so drastic. Social distancing guidelines have, in some cases, necessitated complete shutdowns of small businesses, causing economic difficulties far more severe than those of a typical recession. In turn, the temporary hold on regulatory red tape has allowed banks and other lenders to concentrate their efforts on processing loan applications.
Lenders began processing PPP loan applications on April 3rd and have since been processing extraordinary volumes of applications, straining lending operations. This bottleneck has given an opportunity for financial technology (fintech) industries to shine. In particular, Kabbage, Inc., a major player in the Peer-to-Peer Lending Platforms industry has partnered with an SBA-authorized lender to automate PPP loan application processing. Going forward, lenders are expected to continue partnering with fintech companies to facilitate faster loan processing and thus economic relief.
