In the wake of covid-19, which brought major economic activities in the country to a standstill, the Reserve Bank of India (RBI) in March 2020 allowed a moratorium of three months on repayment of term loans. The central bank in May extended this moratorium period by another three months till 31 August. Mint recently reported that RBI may extend the moratorium for some stressed sectors. Given that most industries are still reeling under stress, Disha Sanghvi asked experts whether or not the moratorium should be extended further for all categories of borrowers
A blanket extension will prove to be detrimental
In the wake of the covid-19 disruptions, the moratorium was necessary and enabled borrowers to reorient to a new reality. But a blanket extension beyond six months will prove counterproductive on many fronts.
If borrowers do not get back to monthly loan servicing, the banks won’t be able to assess portfolio behaviour and, therefore, will be unable to develop appropriate credit policies for incremental lending.
In the absence of fresh credit, there is no start point for a demand lift. Borrowers should be encouraged to look at financial discipline in the eye and honour commitments. Moratorium is not a free source of credit, and this relief isn’t available indefinitely, which means EMIs have to be paid at some point and unpaid EMIs do carry an interest cost.
Severely hit sectors such as automobile, aviation and hospitality should be granted relief for another three months, or a one-time restructuring of loans. Subsequently, RBI should permit banks to restructure loans without downgrading asset classification
We need to approach loan moratorium with caution
RBI announced the moratorium on term loans and cards to allow customers to balance lives and livelihoods. But the interest for the moratorium period gets added to the principal leading to increased debt. For consumers in the early stages of a loan, the impact will be even higher. It is important to maintain financial discipline and ensure that the amount saved by deferring the EMI is not used for discretionary spending.
For non-banking financial companies (NBFCs), the impact has been higher as it was an important source of liquidity apart from bank funding or equity capital. Banks have increased the lending rates for NBFCs given the riskiness in their portfolios. Greater probability of default coupled with the liquidity crunch or higher rate will lead NBFCs to make increased provisions apart from lending at a higher rate, leading to adverse selection.
We need to approach moratorium with caution as there can be implications for financial institutions as well as retail borrowers
Mrin Agarwal, Financialeducator, founder-director Finsafe India, and co-founder, Womantra
People need to start repaying EMIs as interest cost will pile up
The moratorium on term loans, which is ending on 31 August, can be extended to companies in stressed sectors such as hospitality and aviation as well as to MSMEs (micro, small and medium enterprises). These sectors are going through some trying times and RBI should allow banks to provide relief to segments based on the bank’s risk perception.
A blanket moratorium may not be required and neither should it be offered to individuals, given the declining trend seen in the uptake of moratorium in the second phase.
Borrowers, however, need to remember that availing of the RBI loan moratorium means their interest costs will go up further. Thus, it is recommended to make repayments as and when liquidity is available.
With the covid-19 situation not getting better, borrowers will continue to face cash flow issues and, hence, the provisioning made by the lenders needs to be carefully scrutinized, as there is a risk of these loans turning into non-performing assets (NPAs).
Arun Singh, Global Chief Economist, Dun and Bradstreet
Moratorium extension for retail segment to spur demand
The extent of covid-19 disruptions have been much worse than anticipated. Our business credit scores derived from the 2019 financial performance indicate that 71% of Indian businesses fall under the “slightly greater than average risk” category. This is because companies had recorded inconsistent growth trends, reported losses, faced liquidity issues and working capital challenges.
This situation is expected to have further deteriorated due to the impact of covid-19. The extended period of lockdown, the shift in the peak period of infection, and the increasing health expenditure will have a strong impact on growth. The current scenario, thus, warrants a further extension of the moratorium period as the financial health of firms remains weak.
In the absence of cash-in-hand benefits under the stimulus package, extension of the moratorium to the retail segment which comprises of housing and consumption loans, including credit cards, is much needed to support and generate demand impulses
