EMI Moratorium: A double-edged sword for borrowers

Borrowers must be informed that the moratorium does not mean waiver and will increase the cost of repayment.

The COVID-19 pandemic may turn out to be a dominant impediment for India’s banking sector’s resurgence, which would, in all likelihood, affect the credit flows and eventually, the economy. Moratorium seems to have become a between-the-devil and the deep-blue-sea kind of situation for the banking sector, where even the opinions of industry experts are divided based on their stakes.

While corporate India is looking forward to the further extension of the moratorium, the banking and financial sector has raised its concerns and is not in favour of it. The catch is that nearly 80 per cent of customers of public sector banks and 40 per cent of private sector banks have availed the facility, which is posing a threat of bad loans and a subsequent spike in NPA that may need extensive write-offs. The RBI’s recent financial stability report seems to be affirming the same, projecting NPAs to rise to 12.5%, the highest in the last two decades.

If sources are to be believed, private banks follow a more structured approach and do better due diligence when it comes to approving moratorium.

It is often believed that schemes of such magnitude often require a high level of planning to execute, but the sudden announcement in the wake of the pandemic has overloaded the banks. Moreover, such schemes require full capacity working and proper infrastructure to address the volume. Still, the banking sector has been operating with only 40 per cent of its capacity due to the shortage of staff. Specific critical procedures that involve confidential information and data cannot be performed outside the secured network and, therefore, work from home can never be an option.

While the banking fraternity is unanimously against any further extension, the corporate world is still under stress. The majority of the businesses are yet even to turn fully operational and therefore are not in a position to pay back their loans.

Considering the moderate rate of economic revival and unlock restrictions, it looks highly improbable that borrowers will start repaying loans immediately, resulting in the banking sector staring at a considerable NPA risk.

But are banks ready for NPAs? In an emergency credit guarantee scheme (ECGS), the government has given 20 per cent security for facilities availed by MSME units. For moratorium opt-in, the bank will not ask for any EMI payment for the moratorium period. Still, the interest will continue to accrue on the principal outstanding for the moratorium period at the contracted rate of the loan. This will result in the loan tenure getting extended post-application of a moratorium.

Banks still operate in the broader environment, but NBFCs operate in short-term liquidity and higher risk segments. Raising capital is another concern that NBFCs have, and saving has turned into burdens. Meanwhile, to provide financial support to the NBFCs, the government has announced a particular liquidity scheme through a Special Purpose Vehicle (SPV) thru SBICAP (State Bank of India). It will manage the operation and aims to cut the ongoing risks to the financial sector. The SPV will purchase the short-term papers from eligible NBFCs or HFCs, who can utilize the funds under this scheme solely to get rid of existing liabilities.

It is a tough ask for RBI to strike a balance between the demands of the reeling corporate sector and the banking sector. The most viable solutions include either a one-time restructuring of debt or extending the moratorium. However, the blanket moratorium extension may not be a prudent choice. It might unnecessarily benefit those who don’t require that and put additional pressure on the financial institutions. So, the moratorium mechanism needs to be drawn well, which should consider the stressed sectors and those businesses and individuals who have faced the brunt of pandemic.

Also, the restructuring is touted as another workable option, which might reduce the burden to an extent. Still, for that, the regulator will have to chalk out terms of restructuring before 31st August.

Lastly, the borrower education has to be the catalyst for improving the liquidity with the banks and enabling the lending cycle to kick off. Many sectors are opting moratorium with hopes that the loan will eventually be waived off for that period in the future under economic pressure like farmer loans. Borrowers must be informed that the moratorium does not mean waiver and will increase the cost of repayment. So, it is advised to start the compensation as soon as the liquidity improves.

The RBI has to have nerves of steel to spell out the guidelines as economic revival is deemed to be slow, and unemployment is looming large that might aggravate the recovery.

(By Kailashnath Adhikari, Managing Director, SAB Group)