Here’s Who Should Avail RBI’s Covid-19 Moratorium
It will be prudent for borrowers who have the financial capacity to not break the discipline of servicing borrowings on time.
The Reserve Bank of India, in its out-of-turn Monetary Policy Committee meeting, took some dramatic and game-changing steps covering a wide range of issues:
- Rate cut: Repo rate cut by 75 basis points to 4.4 percent; higher reduction in reverse repo rate by 90 basis points to 4 percent to encourage banks to lend and not deposit money with the RBI.
- Liquidity: RBI had injected liquidity of up to Rs 2.8 lakh or 1.4 percent of GDP since the last MPC meeting on Feb. 6, 2020. The RBI measures announced on Friday will help inject liquidity further by Rs 3.7 lakh crore or 1.8 percent of GDP.
- Moratorium: All lenders are allowed to permit moratorium for a period of three months on all types of term loans.
- Deferment: Working capital borrowers can defer interest payments by three months. Furthermore. banks are allowed to recalculate working capital requirements by increasing drawing powers.
- Regulatory relief: Deferment of the implementation of net stable funding ratio and counter-cyclical capital buffer of 0.625 percent by six months.
This is a comprehensive package addressing both the price and the availability of money for every borrower. For the lending institutions, the provision of liquidity and regulatory relief means they gain confidence in lending again. Many borrowers, whether large corporate houses or small and medium enterprises have seen a significant reduction in their cash flow generation as the country has been locked down for 21 days in its fight against Covid-19. These measures should help address some of the immediate liquidity and regulatory concerns for both the borrowers and the lenders.
Measured Repayment Relief For Borrowers
RBI has followed a nuanced approach in offering the moratorium. It has not made it mandatory for every borrower to necessarily avail the moratorium. If a corporate, SME or individual is not financially stressed, they can continue to repay their obligations to the lending institutions. Note that what the regulator has allowed is the deferment of the payment for a period of three months – the outstanding amounts against the borrower will continue to accrue interest.
This self-selection will mean that only the genuinely financially-stressed borrowers are expected to avail the moratorium.
It is too early to gauge what proportion of borrowers in each segment may choose to use the facility offered by the RBI. The behaviour of different segments of customers will hence depend on a wide variety of factors, including the cost of funds, other competing requirements, etc. For example, in the case of high-cost products like personal loans, deferment of the payments could lead to a meaningful increase in outstanding amounts.
It will be prudent for the borrowers, where they have the financial capacity, to not break the discipline of continuing to service their borrowings on time.
How Will Banks Manage This Period?
Banks will face some unique challenges in managing their liquidity position. Depending on the mix of their advances and repayment terms, different banks will find varying sums of monies that might be withheld by their customers over the next few months. However, given the ample liquidity provided by RBI via a wide variety of measures, the banks should be in a position to tide over the situation.
If the lockdown were to open up for good by mid-April, we could see a sudden restart of the economic activity – this will be the best antidote the gloom surrounding both the health and wealth of India!
Rajiv Anand is Executive Director - Wholesale Banking, Axis Bank.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.