Bring on the moratorium tool: Why a timely humanitarian act is a must

Published: March 24, 2020 2:40:56 AM

The COVID-19 Economic Response Task Force is bound to be flooded with several recommendations—sector-specific bailouts, tax holidays, direct transfers, grants, loan support and guarantees, and so on.

moratorium tool, humanitarian act, financial risks, COVID-19, Economic Response Task Force, Reserve Bank of India , financial expressThe Indian economy is now confronted with two potential Stage 3 crises.

By Anjalee S Tarapore

The coronavirus has obliterated the debate of whether India is undergoing a cyclical or structural slowdown. Health, economic, and financial risks have morphed into each other, leaving all in uncharted territory. The devastation is apparent to all, yet quantifying economic losses at this juncture is akin to shooting darts in the dark. Rather than doomsday long-term projections, a sharper focus on defence strategies that are quickly implementable may be preferable.

The COVID-19 Economic Response Task Force is bound to be flooded with several recommendations—sector-specific bailouts, tax holidays, direct transfers, grants, loan support and guarantees, and so on.

Globally, all governments and central banks are announcing a slew of measures, with the assurance that they stand ready to do “whatever it takes”. Yet, Mario Draghi’s now-famous catchphrase may not be sufficient to assuage the deep fear that has set in financial markets.

Due credit must be given to the Reserve Bank of India (RBI) for deploying various policy tools to infuse liquidity in the system, and enable the easing of interest rates. While the industry’s call for drastically lower interest rates is getting louder, the reality is that monetary transmission still remains slow. Though there is scope for lower interest rates—which, in all likelihood, will happen—some other measures merit priority.

The Indian economy is now confronted with two potential Stage 3 crises. In financial parlance, stage 3 indicates non-performing assets, and in health parlance, it entails a community-level outbreak.
The non-performing loans overhang has been weighing down credit growth, which has dropped to a low of 6%. So far, retail credit has held up, growing at double the pace of overall bank credit. Yet, evidently, stress is creeping into retail credit as well.

Perhaps, what is keeping banks and financial sector entities on tenterhooks is the fast-approaching financial year end (March 31). There are so-called ‘targets’ to be met, and in an already slowing economy, these challenges get amplified. The combination of low credit growth and higher non-performing loans does not bode well. Understandably, organisations are under pressure to maximise their performance, yet, there has to be a recognition that these are not normal times. Right now, people risk must be prioritised over any other financial risk.

The aam aadmi borrower is going to be under increased financial strain. Businesses have been struggling for a while, yet, no one anticipated businesses to evaporate overnight. The call for loan moratoriums has already been articulated. While such dispensations have been provided on occasions in the past, the criticality now lies in the timing of announcing the forbearance.

If a borrower knows that they have, say, another two or three more months before being classified as a defaulter, chances are they will be more likely to strictly adhere to health advisories asking people to stay at home. More importantly, an early dispensation will also mean that collection teams of banks and financial institutions, currently out in full force, will not be under pressure to be on the field, collecting individual overdue amounts.

There will be those who will caution against a blanket moratorium as it may create a moral hazard. But, clearly, this is not a call for a loan waiver, or free money. This will only result in an extension of the tenor of the loan, or what is termed as a payment holiday.

Decisions on whether exemptions for this period should be granted on individual credit bureau scores may be determined later. The same holds for decisions on provisioning requirements.
In these times, one must plan for the worst, but hope for the best. A timely humanitarian act by the regulator will go a long way for the common man. RBI should act now.

The author works for a leading housing finance company. Views are personal

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