New headache for banks: Let the lenders decide on loan moratorium

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Published: April 6, 2020 2:01:55 AM

The Reserve Bank of India (RBI) should not have allowed borrowers a moratorium on loan repayments.

The better way to address the problem was to have left it to lenders to decide which customers would be eligible for the repayments holiday.

While there is no denying that the next several months are going to be nightmarish for businesses given they are going to face severe cash-flow pressures following the 21-day lock-down, the Reserve Bank of India (RBI), nonetheless, should not have allowed borrowers a moratorium on loan repayments.

The better way to address the problem was to have left it to lenders to decide which customers would be eligible for the repayments holiday. As analysts have rightly pointed out, a break of this kind tends to be misused, and one can now expect repayments to be delayed by much longer than just three months.

In fact, it could take as long as a year for some of them—the smaller companies—to get back on their feet. Even though lenders are making it very clear that the benefit will come at a cost, most borrowers are expected to use the breather and worry about the charges later. Had it been left to the bankers, they could have used their discretion to pick out the customers genuinely in need of relief; they could have allowed those borrowers who have provided enough collateral to use the moratorium window while continuing to recover the money from unsecured borrowers. A blanket breather can be justified for microfinance customers, and bankers need not worry too much about home loans either, since the property is mortgaged to them.

However, allowing those who have borrowed against credit cards to delay repayments was not warranted. While banks have been allowed to reassess the working capital limits, the fact is that, very often, the exposures are governed by a consortium, and therefore, require a sign-off from a majority of the lenders.

With even those who can repay their loans asking for a moratorium, banks’ books will now be upset for three months, or probably much longer. That, then, will lead to uncertainty, making it difficult to gauge the true quality of the balance sheet—because the asset classification does not change.

Investors, understandably, will be reluctant to invest in a bank whose balance sheet is not up to date, so banks will find it hard to raise capital at a good valuation. According to analysts at Nomura, assuming all the installments are placed under moratorium, it will amount to 4-5% of loans for the banks, and around 25-50% of the net worth. It would have been far better for banks to take the hits as they come—and set aside the required capital—so that they are clear about how much growth capital they have to be able to lend to new customers.  The uncertainty about how much they will actually be able to recover after three months could keep them from lending to good customers. And, that is not good for business.

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