can Banks just call in a loan?

I've read this report from the Australian about trouble if foreign banks call in loans.

Trouble ahead if foreign banks call in debts

NOW that the share market's taken last week's much expected breather, it's worth taking a measured look at some of the surprises that might yet be in store for the Australian economy in 2009.

The biggest one for local borrowers may turn out to be a push by foreign banks to run down their lending books in Australia. It's a classic situation that Australian corporate borrowers won't be able to exert much control over at all.

It's not good news but we've seen it happen before.

There are still a few greybeards around who remember Japanese bank Sanwa's astonishingly ill-considered decision to call in all its loans in Australia in the mid-1980s. Clients had to refinance at short notice under difficult conditions or sell up.

There's still a Sanwa Australia in the book but it is unrelated since it deals in industrial minerals. Don't expect to see the words "Sanwa, Australia" and "Bank" in that order doing business here any time soon.

The reason for the push to run off loan books is that many European countries, led by Britain, have seen their major trading banks effectively nationalised because of the balance sheet disasters of 2008.

So what? The word has gone out to the public servants to cut back on all non-core operations and Australia, partly because of its distance, is strategically non-core. The worst hit countries, and this list is by no means exhaustive, are Britain, Spain, Belgium and the Netherlands. And we haven't even mentioned the US banks.

But what if businesses are going well? See the above instruction. Banking contacts suggest that the following list of orders might well have been handed to the new banking chiefs by nervous central bankers:

* One, get back to the core business of lending retail and commercial on your home turf. No private banking, investment banking, wealth management and all those add-ons. They must all go.

* Two, do not run down retail lending on home turf. Retail borrowers vote.

* Three, get out of all geographical and sectoral markets that are not strategic to your country of origin.

And that's Australia's problem: there's about $1.2 trillion of private debt in Australia owed to overseas institutions. Clearly it won't all be called in at once, and a lot of the money is too well embedded to even consider leaving, but offshore lenders may yet start looking much more closely at their exposures than they have to date.

And a lot of the loans don't pass the "strategically important" test since that one probably never figured when the loans were originally advanced.

You could say we're prisoners of geography: we're just too damn far away to justify serious analysis at the bank's head office in, say, Edinburgh's Charlotte Square or the 2nd Arrondissement of Paris, where the mood is all about reducing exposure wherever possible.

But they can't just call in a loan, can they?

Read the small print. The first way out is the obvious one, the loan rollover. That gives the bank all the excuses it wants to pull the plug, and if they really want to play dirty, there are the loan covenants.

In the good times no one looks at them but when the loan was made the lender may well have imposed minimum and maximum ratios: one of the most common minimum ratios is the debt-service-coverage ratio (DSCR), the ratio of net operating income to debt.

If the DSCR drops below a certain number, the bank reserves the right to call the loan in, thus forcing the borrower to seek finance elsewhere. So far that's been rare, but don't rely on it. Why should the banks be kind to their borrowers when they're not even trusting each other very much?

Did you notice that the Royal Bank of Scotland recently sold down its 4 per cent stake in the Bank of China? As one veteran put it last week, it will be a long time before RBS can expect to resume doing business with anyone in the Middle Kingdom, forced sale or not.

The Hong Kong Government, meanwhile, had to pump about $4 billion into the former British colony's smaller banks, some 24 of them, because the three biggest banks there, BoC, Standard Chartered and HSBC, were too tied up with their own problems to help out.

It's also worth noting that Prime Minister Kevin Rudd's much discussed guarantee of Australia's banks in September had one arm that wasn't specifically aimed at helping retail investors at all: it was to safeguard our banks' ability to borrow offshore. There were worries about the security of deposits with some of our smaller banks and they were certainly beneficiaries, but only in a vicarious way.

Offshore banks have lent funds direct to Australian corporates and to private equity ventures but it's also worth remembering that they have been major providers of finance to Australian retail banks for years, and it appears that nervousness among offshore credit providers was the principal reason for the provision of the "rent-a-rating" scheme whereby lower-rated entities have been able to use the Government's AAA-rating in exchange for fees calculated on the difference between the borrower's rating and AAA: the lower, the bigger.

Perhaps the simplest rule of thumb for the forthcoming pulling-in of horns is the reduction in gearing that we can probably look forward to.

This isn't gospel but there are well-sourced reports that British banks are under pressure to bring their gearing down from 17 to 12 times and US banks from 17 to 14 times.

Investment banks, or what's left of them, will be expected to cut their gearing from 30 to 15 times.
I am not too worried about foreign banks calling in loans now as loans in Australia still have value (and more likely be so in the future). Also I am sure government will step in buying all the assets banks want to get rid of and none else will buy.
What worried me is that there are loans like westpac start selling at 3 year fixed rate when their funding for same time are higher. And the risk that banks might borrow short and lend long term because at the moment they make more money. Overall loans in Australia are well over 3 tril$ and of those loans the one with cheap fixed rates can go up very fast in value. Can't imagine then if inflation step in again and rates shoot up the government would step in and buy all this distressed loans banks would call back in. Or at least they can't do if amount are in the tril$. I point out that if inflation shoot up in Australia there is no RBA rate that can't stop interest rate going up, I remember that market (creditor and borrower) set rates of loans.
So is anyone on this forum expert on the matter and explain if banks in australia really can call in loans? Or the report from the Australian is crap (like often on any Astralian media)
 
Sounds like crap to me. Technically they probably can, but they wont.

For a start, they are too stable to need to.

They're also too profitable to need to.

And since people wouldnt be able to repay their loans, they'd have to refinance. And if banks got to this stage, then nobody would be lending and the banks would just be sitting on a whole load of worthless property.
 
Read the fine print. My understanding is that just about all loans have a clause about "payable in full on demand".

Would it happen? Probably not. Any bank wanting to end its loans would probably sell its loan list to someone else - this has already happened between some Australian lenders.
Marg
 
Guys

The article is about commercial lending not home mortgages. Commercial lending is very difficult and very tight in Australia atm (covenant heavy). By comparison home lending is still quite liquid.
 
Guys

The article is about commercial lending not home mortgages. Commercial lending is very difficult and very tight in Australia atm (covenant heavy). By comparison home lending is still quite liquid.

More commercial lending difficulties in NSW.

Anyone got the cash to buy a few pubs. Going cheap :p
 
The legal avenues are there for the banks to call in a loan if they doubt your ability to repay - even if you are not in arrears.

But the reality is the bank would be desperate to do this... The negative press and political difficulties would be overwhelming. There would be a real risk of government intervention.

To reduce their exposure, banks would most likely just tighten up the flow of new loans and extensions of existing loans, to gradually reduce their book.
 
We have to understand banks are not charities - they have to protect their shareholders' equity as much as the next business. Banks do not make big margins on lending - so they have a natural tendency to be risk averse. It is all about protecting capital and as we head towards recession - which we undoubtedly are in my view - their risk policies will tighten and we will see many of the disgusting lending tactics that happened in the last recession (I was lending then and saw some disgusting tactics......)

In general terms the ability to call in a loan depends upon the facility being offered and the terms of those facilities. Overdrafts are repayable on demand - theoretically - with repayment usually demanded based upon a formal notice of default or breach of specific covenants, based around weakening ability to service /re-pay debt - i.e. weakening performance or weakening security.

I think all those with any borrowings need to review the terms of their lending very carefully and look at de-risking themselves as far as possible. Especially if we are headed for a far from perfect financial storm. Personally I believe March 2009 will be a nightmare for the Aussie Economy with a number of major insolvencies occuring . If only half our predictions come true - it must be about de-risking all our personal positions regarding borrowing .....the banks are going to get tougher as recession begins to bite....

Tim Lea
Cash Stream Financial
Working Capital Specialists
 
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