Dr. Madhavankutty G
Head – Banking, Economy & Policy – ET Prime, Times Group
Background:
The Reserve Bank of India (RBI) first brought about a moratorium on loan repayments for three months beginning March 1, 2020. This was, initially, brought about as a temporary measure to reduce the stress faced by borrowers due to the ongoing Covid-19 pandemic. However, the RBI extended this facility by another three months to August 31, 2020. Though no direct linkage at the first sight, this has to be seen in the context of the stimulus package worth Rs 20 lakh crore announced by the Government, recently, to provide relief to stressed sectors, farmers and migrants.
Moratorium defined:
A moratorium is a relief from payment of principal and interest, or Equated Monthly Installments (EMIs), for a specific period of time so that the burden is reduced. But, it has to be noted that this is different from a waiver. A moratorium only postpones the repayments and does not waive it. So, an individual or a firm will be able to defer their EMIs during the specific period but will have to repay it later with interest. Hence, this is to be seen as a temporary measure to provide relief only to tide over a stressful period.
Are all borrowers automatically eligible?:
Borrowers are not automatically eligible. They must give a separate application to their banks to be included in the moratorium. Initially, there was confusion over whether the NBFCs can avail moratorium on loans they have taken from banks and also if borrowers of NBFCs would be covered. NBFCs argued that while their borrowers cannot be discriminated against, if they themselves don’t get moratorium from banks, cash flows will be further strained. However, RBI later clarified that this is for all classes of borrowers without any distinction and lenders must have a board approved policy to implement the scheme.
IMPLICATIONS
May lead to rise in interest cost:
As stated above, moratorium is not an outright waiver of loans but just a deferral or postponement. Hence, those who have availed it will have to pay interest even on these deferred payments as things stand today. This will lead to higher cost ultimately, and may not be beneficial in the long run, other than helping to tide over temporary cash flow mismatches. Those with enough liquidity would be actually better off not using the scheme. The burden of interest on the deferred amount would be felt more in the case of big ticket loans like housing loans.
A lot depends on the age of the loan. New loans have a larger proportion of interest built into the EMI, accounting for 80-85%, in the first few years. This progressively reduces as the loan is paid off. So, if a new loan goes into moratorium, a higher amount will get added as interest. How this interest will be recovered depends on the banks. Some may seek a one-time payment in June, while others may extend the loan tenure or even hike the EMI after June.
Home loans charge an annual interest rate of 8-9% and personal loans 12-18%. But credit cards charge 2-4% per month for rolling over the balance. If you defer the payment for two months, the cumulative interest could add up to 4-8%.
NPA status also deferred:
Placing under moratorium would mean that these accounts would continue to remain standard (no NPA tag) till August 31, 2020. This will certainly help banks from showing huge NPAs in their books. However, there is also a section which feels that an extension for more than three months was not necessary. Meanwhile, a petition has been filed in the Supreme Court urging to give a directive to RBI to waive interest portion also since the purpose of the scheme will be defeated otherwise.
Beneficial from credit scoring perspective:
Under normal circumstances, when there is a default in EMI, the credit score is adversely impacted. However, since this moratorium is through a regulatory guideline, RBI has specifically asked credit scoring agencies not to downgrade the credit scores of those under moratorium. Low credit score adversely impacts borrowing capability as such entities will receive future credit only at higher interest rates. In a pandemic induced slowdown, when jobs are scarce and salaries are cut, this is a welcome move.
CONCLUSION
A moratorium in isolation, however, may not be of much help. It must be accompanied by loan restructuring, a mechanism where the terms of the loan and repayment periods are discussed afresh between the lenders and borrowers. Government has announced a number of fiscal incentives for various sectors including MSMEs and NBFCs. Moratorium on loan repayments must be seen as a measure complementing such initiatives.
DISCUSSION QUESTIONS
1) A customer came to know of the RBI moratorium only 6 months after it has come into force by which time the scheme had expired. He decides to complain to an appropriate judicial forum. Will it hold? (Hint: para 2)
2) A customer took advantage of a 6 month moratorium offered by his bank under the RBI scheme and got his EMI deferred. From the 7th month onwards, when he resumed normal repayments, the bank insisted on interest for the deferred period also. Can the consumer approach a judicial forum against the bank? (Hint: Implication 1)
3) A man with a credit score of 750 found that (after availing the EMI moratorium offered by his bank by the circular of RBI), his score has come down to 600. This made him ineligible for more loans. Is it justified? (Hint: Implication 3)
4) Mahesh has a credit card outstanding of Rs.10,000. He has decided to take advantage of the moratorium scheme. Is it a good move? (Hint: Implication 1)
5) A customer has two loan accounts. With Bank X, he has a housing loan that was taken just three months back, and with another bank, he has a vehicle loan which is almost three years old. If he wishes to use moratorium offered by RBI, which loan should he preferably consider? (Hint: Implication 1)
REFERENCES
- Reserve Bank of India website
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Good info. If an individual is responsible and his conditions ( like state govt salary only 70% paid) presenty donot clear full payments, accepting the moratorium offer is very supportive. The banks shall adheer to the realpromsies and shall not levy penalties later. Its better than, individual evading payment.