The intent of the RBI moratorium scheme was to provide relief to borrowers triggered by COVID-19, but there was a mismatch between borrower expectation and the moratorium schemes offered by several lenders.
Financing activity was dominated for a large part by refinancing and stressed lending in 2020. Shilpa Mankar Ahluwalia, Partner, Shardul Amarchand Mangaldas and Co. says “The RBI moratorium scheme provided much-needed relief to borrowers affected by COVID-19, but was a temporary short-term solution.”
In an exclusive interview with Priyadarshini Maji, she says the regulators will probably need to think of additional strategies to manage stress in the financial sector while also ensuring liquidity as the economic impact of COVID-19 continues into 2021.
- Reviewing 2020: What were some of the major developments?
Financing activity was dominated for a large part by refinancing and stressed lending. The RBI moratorium scheme provided much-needed relief to borrowers affected by COVID-19 but was essentially a temporary short-term solution. The regulators will probably need to think of additional strategies to manage stress in the financial sector while also ensuring liquidity as the economic impact of COVID-19 continues into 2021.
- Loan Moratorium, Financial Stimulus – Its intended effect and measures by the RBI
The RBI had issued a moratorium scheme on March 27 allowing banks and lending institutions to grant a moratorium on payment of interest, principal and EMI payments falling during the period March 1 to May 31, 2020. This period was subsequently extended until August 31, 2020. The RBI also subsequently (in August 2020) introduced a one-time restructuring scheme allowing banks and lending institutions to restructure certain categories of loan accounts facing COVID-19 related stress, which was a much-needed initiative.
The intent of the RBI moratorium scheme was essential to provide relief to borrowers given disruptions to income and businesses triggered by COVID-19 without lenders having to classify these accounts as “bad” or borrowers having to face a downgrade in their credit rating.
The intent was never to require lending institutions to either implement “interest waivers” vis-à-vis borrowers (or certain groups of borrowers) or to absorb the cost of the moratorium, which means that lenders passed on the cost of deferring repayments (i.e. interest on interest) to the borrower. The RBI also made it clear that banks have the ability to frame their own board approved moratorium schemes and have the flexibility to decide which groups of borrowers have the right to avail of the scheme and what the terms will be.
There was a mismatch between borrower expectation and the moratorium schemes offered by several lenders. While it is important to provide relief to borrowers, it is also important to recognize the stress facing the banking sector, and a framework that allocates the financial cost of COVID-19 entirely to the lending institutions or artificially delays classification of stressed accounts as NPAs may not be viable in the long-run.
- Banking and finance sector post-COVID-19
The banking and finance sector saw its own share of stress post-COVID-19. The non-banking financial institutions, in particular, faced a liquidity crunch, triggered also partly by the RBI moratorium scheme that did not extend the benefit of the moratorium to NBFCs (as a borrower group), while many of them did roll out schemes for their own set of borrowers.
Given that the adverse economic impact of COVID-19 is likely to continue, the banking sector will need to re-look at how to manage stressed assets. While the RBI moratorium framework was effective in providing short term relief to borrowers, in some ways it merely postponed the problem to a future date with added costs.
One key aspect of creating an environment where lending institutions extend liquidity to borrowers who may be slightly stressed is to ensure that lenders have the ability to enforce security upon default. Post COVID-19, courts have, on several occasions taken “borrower-friendly” positions and restrained lenders from enforcing security. Such a trend can significantly alter the credit risk of stressed lending and will be important to alter, given that as a result of COVID-19, there is an increasing number of stressed borrower groups in need of financing.
- Outlook and roadmap for 2021
2021 may, hopefully, witness some return to “normalcy” following the outbreak of COVID-19 in 2020. To ensure that the banking and financial sector is able to meet the liquidity requirements of a stressed economy while still being able to manage its own stress will be critical.
Tapping into foreign investment via the bond market is certainly one way of increasing liquidity, and relaxing some of the restrictions around foreign portfolio investment into INR debentures could be one solution to bring in additional debt capital into the financial system.
It is important for banks and lending institutions to have the flexibility to channel their capital, manage their own schemes and allocate costs linked to moratorium programs and other relief measures. It is equally important for the RBI to control the framework that requires banks and lending institutions to identify and provide for stressed loans. Judicial or other interference in this process could have serious repercussions.
- Currently, India is the world’s third-largest fintech market with innovations in digital payments. Can it surpass the USA and UK in upcoming years?
Digital payment solutions in India have witnessed tremendous growth. This is because of two key factors:
(i) the availability of a first-class inter-operable digital infrastructure (managed and operated by NPCI);
(ii) the ability to offer financial services linked to a simple Aadhaar based e-KYC process.
Increased access and usage of smartphones and improved internet connectivity into unbanked areas will only increase the user base for digital payment products.
- How digital payments’ industry will be impacted once the covid situation is normalized?
The shift to digital payments is likely to be a permanent one and will continue post-COVID-19. Even though many people have moved away from cash because of the risks associated with transacting in a face to face format given COVID-19, the benefits and convenience of digital payments will continue to fuel the growth in digital payments volumes and transactions.