Moratorium by no means is a waiver of payment but a mere deferment where the interest timer still runs.
By Veena Sivaramakrishnan and Zubin Mehta
With the outbreak of COVID-19, there was an industry-wide demand for regulatory intervention to arrest some of the imminent stress in the financial condition of borrowers. As a first step, the Reserve Bank of India (RBI) on March 27, 2020 introduced its regulatory policy to address some of these concerns. One of the key features was a three-month ‘moratorium’ by banks to their customers across all segments, in relation to payments on their loans. The proposal being simple, where in order to ease financial stress for businesses, banks were to relax payment pressures immediately and defer the payments albeit with accrued interest for months when moratorium was availed.
The RBI’s Statement on Developmental and Regulatory Policies and the Regulatory Package issued in March advised that the policy extends the moratorium to borrowers who have been impacted by the Covid-19 outbreak.
While the real impact of this is yet to be seen, recent reports have suggested that the dispensation has helped borrowers, by having the option to not pay any equated monthly instalments (EMIs) for loans including home loans, auto loans, to help tide over their liquidity crunch and in some cases conserve cash with the anticipation of Covid-19 having a longer impact.
However, the choice of availing a moratorium can been a difficult one, as moratorium by no means is a waiver of payment but a mere deferment where the interest timer still runs.
Post March 27, it is understood that the banks were expected to make the ‘moratorium benefits’ available to ‘all’ borrowers on an automatic basis, without any additional parameter when determining a borrower’s eligibility for availing such moratorium. As this is not the strict letter of the law, it is possible that the expectation stemmed from the principle of a financier not sitting over commercial judgement and business decisions.
Opt-in / Opt-out conundrum
The expectation and practice of certain banks presuppose that every borrower has been financially impacted and created a mandatory ‘opt-in’ for customers to avail a moratorium for their EMIs. This technically implies that customers are forced to accept the moratorium, unless they specifically ‘opt-out’, and have to bear interest for such period even if they did not want to in the first place; setting a unsafe precedent especially in the credit card sector where the interest payouts are higher for individual cardholders.
Additionally, for the uninitiated, the mandatory ‘opt-in’ could also have an unintended consequence where the customers are not aware of such automatic ‘opt-in’ leading the customer to pay the increase cost on their loan. This subtle nudge of ‘opt-in’ manipulates the choice architecture of an unsuspecting individual who bites into the noble idea of social welfare (greater good by loan extension) without considering compromised personal benefit (interest rates accrued during the moratorium period).
Norms for moratorium
While the moratorium affords a genuine relief for some business entities impacted by the outbreak, the lack of ability of banks to determine and fix eligibility criteria or parameters for granting such dispensation seems to be a larger policy issue.
It is widely believed that banks being unable to independently evaluate each borrower account and having to grant moratorium merely on account of Covid-19 (and having to disregard past antecedents of a case) creates stress for banks especially at a time of when they are facing a liquidity crunch given their own reduced cash inflow.
The change in the RBI’s intent on applicability of moratorium and April 17 policy on Covid-19 Regulatory Package – Asset Classification and Provisioning, provided an augmented stimulus permitting borrowers to defer their EMIs in relation to their loans prior to March 27 even in cases where such loans were under default (but not a non-performing asset).
The benefit of moratorium of past and future EMIs has also been engaged by borrowers, till the extended term of August 2020, who have been in serious debt crisis even long before the onset of Covid-19 to use this opportunity to keep lenders at bay till they have identified solution without the enforcement threat.
For borrowers already in default, accruing of interest is less of an issue. As time runs after August 2020, with the suspension of the Insolvency and Bankruptcy Code, it will be interesting to see the options adopted by borrowers and lenders for resolving such debt. Innovative ways of restructuring will certainly rewrite how Indian lenders and borrowers have adapted to financial distress and the NPA menace.
(The authors are Partner, Shardul Amarchand Mangaldas & Co.)