Coronanomy — 03
Moratorium
“Tough times don’t last, tough men and tough financial institutions do”
On May 9, ICICI bank said that around 32% of its loan book was under moratorium by the value of loans. It was a reference to the responses from its customers to the EMI deferral scheme announced by RBI. The portion is more or less the same for other banks as well and one can broadly say that one-third of the industry opted for it.
Continuing with the RBI announcements from the last blog which covered the measures for liquidity infusion in the system, this one contains the measures which RBI took for relaxing repayment measures.
Announcements regarding relaxing repayment pressures
- Moratorium of term loans
A term loan is usually a long period loan from a bank for a specified amount that has a specified repayment schedule.
RBI states that all lending institutions were permitted to allow a moratorium of three months (1 March — 31 May) on payment of installments of all term loans. Now, Banks were under no obligation to comply with these announcements but that would mean more defaults which is a no-no in banking circles. Thus, all banks complied with it nonetheless. The important thing to note here is that it is just a deferment of payments and not a waiver and banks will continue to charge the interest payments for this period which will result in an increase of EMI payable along with the tenor by 3 months. Thus, CS Setty, MD at SBI, said that if the customers have the ability to pay up, then they should shy away from the scheme because the cost will add up. - Deferment of interest on working capital
A working capital loan is a loan that is taken to finance the company’s everyday needs such as payroll, rent, and debt payments. These are usually short-term loans and often taken by companies that have high seasonality or cyclical sales to help with periods of reduced business activity.
RBI stated that all lending institutions were permitted to allow a deferment on payment of interest in respect of all such working capital facilities. So, after 3 months, the deferred interest of three months will be collected immediately after the moratorium ends. Hence, companies may end up paying 4 months of interest together.
RBI made it clear that moratorium of term loans and deferment of interest payments will not classify as a default, hence there will be no adverse impacts on the credit histories of the beneficiary.
No doubt, the moratorium scheme provides relief to banks as well as its customers. For banks, there is no need to show missed repayments as Non-Performing Assets (NPA) and for borrowers, their credit ratings or bank record won’t turn bad.
But, several people have argued against the moratorium and called for an interest waiver during the lockdown period. On 8th May, the Supreme Court agreed to hear a plea seeking interest waiver on loans during the lockdown period. The petitioner argued that not waiving interest could have a devastating effect and defeats the very purpose of providing relief to customers.
Some Challenges
Soon after the scheme was announced, NBFCs and MFIs complained to the RBI about the discriminatory behavior of banks while providing moratorium relief to them. Banks were unwilling to extend the moratorium facility to all those customers who have a high chance of default such as low-rated companies and institutions such as NBFCs and MFIs as banks are risk-averse and do not want to take high exposure during risky economic environments. As NBFCs and MFIs have already extended the moratorium to their customers, this brought a mismatch of cash flow. RBI intervened and decided to hold a meeting with banks and NBFCs after which banks showed some willingness to offer moratorium to NBFCs.
Still, the controversy was not over as Sa-Dhan (the umbrella body for MFIs) wrote to Finance Minister Nirmala Sitharaman on May 10 that a section of the Public Sector Banks and institutions such as SIDBI, NABARD are yet to offer moratorium to them.
Another controversy soon popped up as On 15 May, Supreme Court issued notices to the Centre and the RBI on a plea of CREDAI (Confederation of Real Estate Developers Association of India) on whether real estate firms are eligible for loan moratorium policy of RBI. The issue raised was that some of the banks are not offering moratorium policy to real estate developers.
The CREDAI said that they are facing triple jeopardy that is
- They are mandated to pay the workers and facing difficulty in getting raw materials
- They have to pay the interest for the moratorium offered by the RBI
- And, making the policy as a discretionary in the hands of lenders make the situation worse
Therefore, the CREDAI sought directions to provide such relief for its members.
RBI back to the rescue
The macroeconomic data available for the first time after the pandemic suggested an austere condition of global and domestic economies. Global manufacturing contracted to an 11 year low and an estimate by WTO, world trade could shrink by 13–32%. Meanwhile, the top 6 states which account for more than 60 percent of domestic economic activity have all been hit hard and continue to remain in red zones. On the other hand, the rural economy mostly dominated by agriculture promises a glimmer of hope as foodgrain production rose to a record 3.7% growth. By May 10, Kharif sowing was also 44% more than the last year as the movement of migrant workers back to their villages have more than compensated for the lack of labor.
After reviewing the situation, RBI decided to up the ante in the war against COVID and took some important decisions which were announced on 22nd May.
- Further reduction in policy rates
After the previous 2 sessions of cut in interest rates, it was again decided to cut both repo rates and reverse repo rates by 40bps which means the current repo rate is 4% and the reverse repo rate is 3.35%.
This decision received mixed responses from the experts. Some believed that this combined with the guarantees announced by the government in the ‘Aatmnirbhar package’ (will be covered in upcoming blogs) will encourage banks to lend and further disincentivize their activity of parking excess money with RBI. On the other hand, one with a more conservative mindset argued that this would not have much impact and would only lead to the lowering of EMIs of those whose loans are linked with repo rate. - Extension of moratorium
As the previous 3 month moratorium period has nearly come to an end with no signs of economic activity coming back to its normal, RBI decided to increase the moratorium period by 3 more months up to 31st August giving a breathing room to all the borrowers. - Conversion of interest into a term loan
This was probably the biggest announcement made on 22nd May. According to earlier conditions, the accumulated interest on all working capital was to be paid immediately after the end of the period. Besides, increasing the moratorium to 3 more months, now the companies have an option to convert the accumulated interest of 6 months into a term loan and pay in EMIs till March 2021. This is a huge relief to all the companies relying on working capital. It is estimated to considerably reduce the amount of NPAs that might have incurred for not paying the accumulated interest immediately.
Although, this is only a provision, not a mandate and the banks have the right to choose whether this will be allowed for all the borrowers.
Conclusion
These policy decisions can go a long way in the revival of the economy, but the impact of policy rate cuts on lending remains to be seen. It also needs to be seen if banks will provide these facilities to everyone or will they continue with their discriminative stance.
Meanwhile, the argument for waiving the interest accrued during the lockdown period still remains in the picture.
In the next blog…
Self-reliant India
On 13th May, Prime Minister Narendra Modi, while addressing the nation, announced a COVID relief stimulus package of 20 lakh crore for ‘Aatmnirbhar Bharat Abhiyan’ meaning self-reliant India and assured the citizens that every sector has been taken into consideration from street vendors to an honest tax paying citizen. He laid down the pillars of ‘Aatmnirbhar Bharat Abhiyan’ to be — economy, infrastructure, technology-driven system, vibrant demography, and demand and also urged the citizens to be ‘vocal for local’ to buy products made in India.
Following this, Finance Minister Nirmala Sitharaman laid out the package in five tranches which contained a lot of long-run reforms, medium-run policies, and short-term relief.
In the next blog, we start to analyze every policy and reform announced in the package.
