The banking sector in India is pushing for a three-month moratorium extension on loan repayments, easing of bad loan (Non-Performing Assets) recognition norms from 90 days to 180 days, and one-time restructuring of loans. This is viewed as a necessary relief measure to tackle the impact of Covid-19 lockdown and the resulting economic slowdown. Such demands came up in the recent meetings between RBI top officials and the chiefs of banks and Non-Banking Financial Companies (NBFCs).
Background Information
On 27th March, 2020, the RBI announced a three-month moratorium (1st March to 31st May) on loan and card repayments. In addition, it slashed its main policy rate, Repo rate by 75 basis points, and reduced Cash Reserve Ratio (CRR) of banks by 100 basis points. These steps were taken to stabilize the financial markets and ease borrowers’ pain.
RBI also stipulated that banks should create a 10% provisioning on all loans that are overdue but not yet non-performing assets (NPA), where a moratorium has been approved. It remains crucial to see how the banking sector manages asset quality post the moratorium period.
Utilization of Moratorium Provision
In the retail segment, higher instances of moratorium utilization were observed in agri loans, micro-credit, commercial vehicle loans, and other unsecured retail products like credit cards. Many borrowers opting for a moratorium had sufficient account balances, indicating that borrowers prefer liquidity in these uncertain times.
Rationale Behind the Demands
The extension of the moratorium is required as factories are unlikely to resume production due to curbs in critical industrial belts, broken supply chains, and increased job losses. Thus, companies may not be able to pay their interest liabilities in September, which may lead to their account being classified as NPA under existing norms.
At present, loans where the borrower fails to pay the principal and/or interest within 90 days are classified as NPAs. Therefore, banks want the NPA recognition limit raised to 180 days to limit the surge in NPAs. The restructure of loans would ease borrowers’ interest burden.
RBI’s Prudential Framework for Resolution of Stressed Assets
The RBI’s June 7 circular mandates banks to recognize stress and initiate a review of default within 30 days. Bankers are uncertain whether this concept on stressed assets and restructuring will be changed by RBI, given the current economic circumstances.
Potential Negative Consequences
The proposed extension implies that borrowers will have to pay instalments and interest charges later, causing a delay in payment. Banks already face sluggish credit off-take and an anticipated spike in non-performing assets due to lockdown and economic contraction. Crisil ratings predict NPAs to rise by 150-200 basis points this fiscal year (2020-21).
The Way Forward
Banks and NBFCs have voiced these demands, asserting that a loan repayment moratorium is inadequate to overcome the crisis. The banking sector suggests that the RBI should offer operational flexibility for a comprehensive restructuring of existing loans and reclassification of the 90-day norm.
