loan moratorium: Loan moratorium extension has two sides; the second one is ugly for banks – The Economic Times

Clipped from: https://economictimes.indiatimes.com

For banks, the extension of moratorium by another three months has two sides.

The 40bps repo rate cut was the need of the hour, given the depressed economic activity and collapse in demand. Another RBI rate cut was more or less factored in, and as a result, India’s 10-year sovereign yields have moved lower by just 10 bps. Nevertheless, equity markets were expecting more from the central bank in terms of incremental Open Market Operations, respite to the banks in terms of not having to mark to market (MTM) their held-to-maturity (HTM) portfolio, and so on.

Not surprisingly, banking stocks are down in trade. Though this announcement wasn’t a bazooka like the previous policy measures, there are some positive measures like the extension of term loan moratorium and an increase in lending limit to corporates.

For banks, the extension of moratorium by another three months has two sides. A clear picture on the asset quality of the lenders will now emerge only by March 2021, instead of September 2020. There is a risk of the moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. And for MFIs and NBFCs catering to the bottom-of-the-pyramid customers, the risk of repayment behaviour getting disturbed is higher.

On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31 diminishes, and therefore the NPL spike for lenders could be lower than what is anticipated now.

The moratorium extension also gives time to lenders to strengthen their collection infrastructure for retail products as restrictions on physical collection/follow-up eases out and collection agencies would have had their migrant workforce back.

For working capital facilities, interest payment has been deferred by another three months, in line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.

We expect more policy response from RBI in future in terms of further rate cuts and OMOs to bring down the yield curve, possibly even some monetisation of government borrowings.

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