Moratorium extension of 3 months by RBI has two sides; the second one is ugly for banks

Governor Das had announced a three-month moratorium for all term loan repayments between March 1 and May 31 at his last address in April.

The loan moratorium will be extended till August 31, says RBI governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.

"The surprise move by the RBI to reduce repo rate to 4 percent from 4.4 percent followed by an extension of the loan moratorium by another three months is a welcome step and can provide solace to the ailing economy whereby EMI burden for the borrowers would be somewhat lowered and would also allow them to defer EMI payments by another three months. For corporate borrowers too, the increase in group exposure limit of banks to 30 percent from 25 percent will bring some relief," said Rajesh Agarwal, Head of Research at Aum Capital.

"The fall in bold yield after the announcement is positive news, the committee's decision to continue with its accommodative stance is further good news but the point remains that even after so much of liquidity, the banks are reluctant to take additional risk and that has resulted in a muted credit growth," he added.

"RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models," said VK Vijayakumar- Chief Investment Strategist at Geojit Financial Services.

"Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue," he added.

For banks, the extension of moratorium by another three months has two sides. A clear picture on the asset quality of the lenders will now emerge only by March 2021, instead of September 2020. There is a risk of the moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. And for MFIs and NBFCs catering to the bottom-of-the-pyramid customers, the risk of repayment behaviour getting disturbed is higher.

On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31 diminishes, and therefore the NPL spike for lenders could be lower than what is anticipated now.

The moratorium extension also gives time to lenders to strengthen their collection infrastructure for retail products as restrictions on physical collection/follow-up eases out and collection agencies would have had their migrant workforce back.

For working capital facilities, interest payment has been deferred by another three months, in line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.

While the RBI governor Shaktikanta Das announced that the three-month term loan moratorium has been extended till August 31, it is to be noted that individual banks have the right to take a decision on whether this will be allowed for all borrowers. It is only an enabling provision and not a mandate.