The lockdown announcement was followed by one on repayment moratorium for borrowers for three months. This was extended subsequently, and the term was now six months. Hence, if one borrowed Rs 1,000 at say 10% per annum, the interest need not be paid for these six months (March to August). The question now is whether banks should have the right to charge interest on the unpaid interest as, technically speaking, the interest not paid—which, for six months, would be Rs 50—was another loan offered to the borrower. If it is not charged, it is a loss for the bank, and if it were charged, the idea of providing support to those in distress would be lost in these difficult times. This is a classic dilemma for all policymakers as all economic action is a zero-sum game.
The government has stepped in and said that, for all loans that are of a magnitude of less than Rs 2 crore, this interest would be paid by the government. Of the total outstanding credit of ~Rs 100 lakh crore, 40-45% would be in this category. The government has also announced that this benefit would be given not just to those who took the moratorium but also those who paid on time. This is to provide a level playing field as those who paid should not be penalised; the announcement, thus, removes the debate over penalising those who paid on time.
These terms mimic the farm loans waiver schemes, with a slight difference. The new scheme covers the interest on interest, and not the principal or the interest. Hence, it is of a much smaller scale. At the limit, if the entire Rs 45 lakh crore of debt were to be covered, the total interest that would be charged at 10% would be Rs 4.5 lakh crore and another 10% on this amount will be Rs 45,000 crore for a year or Rs 22,500 crore for half a year. This will be a payout to the banks on behalf of the borrowers. If this is the deal, it can be considered to be a good stimulus provided by the government, which has been the case in several countries where the interest has been waived and paid by the authorities, especially for SMEs. Such a direct transfer is a step ahead of any guarantee given by the government on loans taken by businesses.
Is this a good move? Yes, for sure! Any support from the government which is universal is welcome as the lockdown has affected many businesses in ways that makes servicing debt quite hard. As this was caused by government action, support through such payouts is appropriate. But, the next question is why not all loans? This is pertinent because while the small players have been affected by job losses and pay cuts (retail) and closure (SMEs), big companies too are in a similar state as the environment has been the same for all. Ideally, the government should cover the entire `100 lakh crore of outstanding debt, which would mean around Rs 45,000-50,000 crore for all borrowers. This is a hard call to take, but helps not just the borrowers but also the bankers.
Ideally, all such schemes should cover only those who do not have the ability to pay. But, by doing so, there is a premium charged of those who pay on time, the classic moral hazard problem. Once it is known that the government will waive off loans (as it happens just before elections in the farming community), there will be a tendency in borrowers to stop paying their dues knowing fully well that support will come in future. This has affected the credit culture in India. Therefore, there must be an omnibus approach so that everyone benefits. Also, ideally, this should be invoked on the grounds of this being a one-off case due to the pandemic and that such extensions of moratorium or interest waiver will not become routine.
The problem becomes complex once the canvas is expanded to cover other institutions. At present, the talk is of bank loans only. What about UCBs, NBFCs, MFIs, PACSs, etc? Clearly, the government will not be able to cover all borrowers, and hence this scheme will be restricted to just the commercial banks.
A logical extension of this issue is whether there must be government support for restructuring exercises too, which involve lowering of interest rate? There will admittedly be a major restructuring exercise once banks figure out the list of clients that need such support. Around 30% of overall bank credit is concentrated in individual loans of Rs 100 crore or above. These loans would qualify for restructuring based on the predefined criteria laid down by the expert committee. With even 10% of this portfolio of around Rs 30 lakh crore qualifying for this restructuring, there could be Rs 3 lakh crore of debt which would need to be reworked for interest rate too. The cost in all these cases is borne by the bank; this has been the experience with the SME exercise done earlier or even the CDR scheme of the past. To protect banks from this setback, the present dispensation could also talk of the government paying for this cost of interest to shore up banks which are already under considerable stress.
The decision of the government to directly support borrowers this time is a step in the right direction. Normally, any support to borrowers by the government should be through the Budget, and the banks should not be asked to bridge the gap. This exercise will lay the template for future forbearance programmes. The government already has subvention programmes for farmers, where it pays 2% of the interest on behalf of farmers who pay their dues on time. It may be useful to have a similar scheme for other borrowers too so that the banking system is able to operate in a commercial manner. Often, thanks to shifting the sovereign responsibility to the public sector banks for running programmes or providing financial support to targeted groups, the PSBs have been forced to overextend their balance sheets, leading to the shrinkage of their P&L balances.
The government has quite successfully moved away from widening the subsidy bill by streamlining operations. The NREGA and Kisan Scheme of cash transfers have worked well in the rural areas in supporting farmers. A parallel can be conceived for addressing businesses that weaken under economic slowdowns. By appropriate intervention, the government will be able to ensure that the banking system remains strong and resilient, and PSBs are able to stand on their own with less capital support in the future.
The pandemic has opened the doors for some unusual measures to be taken by the government, starting with the moratorium. This is a template that can be pursued in future too in the financial sector, which is still facing an upheaval. By following such measures that unburden the PSBs, the government will be able to strengthen their balance sheets, which, in turn, can pave the way for the lowering of its stake in future.
