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Postponing loan installments: A new form of borrowing

Mar 20,2023 - Last updated at Mar 20,2023

In this article, we will analyse the expected effects of postponing loan installments on the various parties involved if most borrowers choose to postpone a large number of their loan installments until the end of the loan period. This could have significant implications for banks, borrowers, market liquidity, short-term demand for goods and services, traders and money supply.

The story of loan postponement began at the beginning of the COVID-19 pandemic when installments were postponed due to the scarcity of liquidity. Furthermore, interest rates were reduced by 150 basis points on most loans. Here are some of the potential impacts:

In the short term, banks may experience a significant decrease in their cash flows if a large number of borrowers postpone their loan installments several times. This may affect the ability of banks to lend money and lead to a lack of liquidity in the market. In this case, banks may need to raise capital or borrow money from other sources to maintain their ability to lend. In the medium term, the liquidity that became available to borrowers as a result of postponing installments will return to the banks through various parties that obtained it. Banks will reinvest the money.

For borrowers, they may have more cash available in the short term. However, borrowers may end up paying more interest over the life of the loan, as the interest will continue to accrue over the extended period. In addition, if the borrowers' incomes or financial conditions deteriorate during the extended period, they may have difficulty paying the larger installments later.

Postponing the payment of loan installments may lead to a significant shortage of liquidity in the market, which means that less liquidity is available for lending to other borrowers, slowing down economic activity due to the positive relationship between loans and economic growth.

With regard to the demand for goods and services in the short term, postponing the payment of loan installments leads to more cash available to borrowers, causing a short-term increase in demand for goods and services. Traders may benefit from the increased demand for goods and services in the short term. However, if deferral of installment payments results in a liquidity shortage, traders may find it difficult to obtain credit or financing to support their trading operations.

Postponing the payment of installments may affect the money supply due to the decline in liquidity available to banks to lend. Although borrowers may have more cash available in the short term, the overall effect on the money supply will depend on the volume of loans and the number of borrowers involved.

In conclusion, if most borrowers delay paying their loan installments, this could have significant impacts on banks, borrowers, market liquidity, short-term demand for goods and services, traders and money supply, which could lead to a slowdown in economic activity. The size of the effects may be greater if more borrowers postpone a larger number of installments, resulting in a rise in the volumes of non-performing loans. Therefore, borrowers should not postpone loan installments just to obtain false temporary benefits because they will pay the price of these benefits later in double numbers, especially if the repayment period is long. Postponing is tantamount to a new borrowing at a high interest rate, especially in these times.

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