The provision of moratorium on long-term loans is a measure that the Reserve Bank of India has implemented for “easing financial stress caused by COVID-19 disruption by relaxing payment pressures” on households and businesses. All major lenders are permitted to defer the recovery of dues, by voluntarily extending the loan tenor. Along with the provision to provide unprecedented liquidity on tap to the lenders, the moratorium provision is expected to help households, firms and the financial system manage their cash flows.
Moratorium Is Only A Cash Flow Management Tool
We need to recognise that, if agreed to by the lender, the moratorium provision gives time to the borrower to re-allocate his or her cashflows. It does not help augment the cash flows in most cases. It can help augment the cash flows only for those borrowers who are in a position to repay and choose not to, as they can invest their cash in a business that gives them a return higher than the cost of debt. In other words, it is of limited value to borrowers whose cash flows have shrunk as a result of fall in their earnings.
Lenders Are Expected To Benefit If Credit Worthiness Of Borrowers Does Not Decline
In a falling interest rate scenario, the lenders are definitely benefited by delay in recovery of dues, as they can raise debt at a rate lower than the rate at which they have lent to the borrowers who are opting to delay their payment under the moratorium policy. However, the deterioration in credit worthiness of these borrowers can impact the lender’s margins, particularly if they end up with credit losses once the moratorium is lifted.
Value of Moratorium Dependent On The Pace Of Economic Recovery
Since the moratorium is only a cash flow management tool, it loses its effectiveness if the borrowers’ earnings or cash flows don’t improve soon enough. If the economic recovery is not V-shaped or there is a structural shift in growth to a lower level, we can expect a sharp increase in NPAs once the moratorium period ends.
India’s Economic Performance And Growth In Household Disposable Income
At this stage, we have experienced an unprecedented collapse in earnings, which was preceded by a prolonged slowdown since Q4 of fiscal year 2017-18.
Not only the recent slowdown and the collapse in GDP growth rates, the country has been experiencing a declining growth in household disposable income (Data Source: National Accounts Statistics and the RBI’s Data Base on the Indian Economy) since 2010, which has also coincided with a decline in growth rate in household savings (except for the last couple of years).
Systemwide Decline In Credit Quality And Its Impact Of Economic Recovery and Cost of Credit
A prolonged slow-growth period could also lead to a systemwide downward revision in credit ratings for businesses and households, as the banks and credit bureaus start evaluating the impact of economic uncertainty on earnings and cash flows, particularly the ones that have opted for moratorium. A systemwide decline in credit quality would imply higher cost of credit and lower willingness to lend, thereby reducing the probability of sharper recovery. It is, therefore, important that all the players in the financial sector value chain (lenders, credit bureaus, credit insurers, etc.) and the RBI look at the problem of credit quality from a long-term perspective and follow a unified approach to credit assessment and NPA classification.
In summary, while the loan moratorium was an appropriate short-term choice, its medium-term value will depend on shape and pace of economic recovery, particularly for those businesses and households whose earnings and cash flows have fallen sharply -- and in a context, where the GDP growth rate has been declining for nearly 2 years and the growth in household disposable income has been experiencing a near-secular decline.
(Anil K Sood is Professor and Co–founder, the Institute for Advanced Studies in Complex Choices. Views expressed are personal.)
