The chorus is growing. Most banks and non-banking finance companies (NBFCs) are of the opinion that the moratorium for term loans announced by the banking regulator should not be extended beyond August 31. This is because they feel that even borrowers who can pay are not doing so, impacting the cash flows of banks. Instead, lenders want a one-time restructuring scheme for loans affected by COVID-19.
“We have demanded a one-time restructuring facility instead of moratorium extension. Moratorium is availed by even those borrowers who are earning. That is not a solution to the current problem. Instead, a restructuring can be done on a case-to-case basis,” said Ramesh Iyer, Vice Chairman and Managing Director of Mahindra Finance.
A restructuring can be done either by reducing the rate of interest, extending tenure or giving a repayment holiday. “There is a fundamental difference between the two,” Iyer said.
At least three other officials from banks and NBFCs too told Moneycontrol that the industry has made this request to the Reserve Bank of India (RBI) and the government in recent meetings.
“Banks do not want another extension of the moratorium scheme. Even if banks can charge interest later on moratorium loans, it is impacting the current cash flows of banks,” said a senior banking industry official on condition of anonymity.
Early this week, heads of banks and NBFCs had met Prime Minister Narendra Modi to discuss industry issues. In that meeting, banks are believed to have raised this point among other issues. The moratorium was originally launched by RBI for a three month period beginning March to May to help borrowers hit by COVID-19 crisis to defer their monthly instalments on term loans.
This was later extended for another three months till August in view of the continuing stress in the economy. The idea of giving moratorium was to avoid a sudden spike in bad loans. Higher bad loans will necessitate higher provisions which impacts the profitability of banks. Provision refers to the money set aside to cover bad loans.
However, banks have witnessed that many borrowers, who don't really require the scheme, are opting for it to delay repayments.
Most banks have seen their moratorium loan portion declining in the second round compared with the first round of moratorium. Big banks like HDFC Bank and Axis Bank have seen their moratorium loans dropping to around 9 per cent in the June-quarter compared with 25-30 per cent in the preceding quarter. In the case of ICICI Bank, moratorium loans as on June 30 stands at 17.5 per cent.
In a recent CII interaction with RBI governor, Shaktikanta Das, HDFC Chairman Deepak Parekh, had requested not to extend the moratorium beyond August. “Please do not extend the moratorium. We see people who have the ability to pay are using this not to pay. Another moratorium will hurt us, especially smaller NBFCs,” Parekh said.
A source of uncertainty
The COVID-19 lockdown has had a significant impact on all industrial activities in the economy resulting in major income loss to many. This, in turn, has impacted the loan repayment ability of borrowers too. Though the number of people who have availed the moratorium in the second round is far less compared to the first, banks have taken aggressive provisions expecting an asset quality shock.
For the banking industry, the moratorium scheme makes assessment of asset quality difficult. For instance, ICICI Bank has made an additional Covid provision of Rs 5,550 crore in the June quarter taking the total COVID-19 provision to Rs 8,275 crore. Among the NBFCs, Bajaj Finance has set aside Rs 1,450 crore COVID-19 provisions in Q1.
In the latest financial stability report, the RBI warned that moratorium loans could lead to higher NPAs in the financial system.
“The regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of SCBs (scheduled commercial banks), going forward,” the RBI said.
According to the RBI, Gross non-performing assets (GNPAs) of scheduled commercial banks could spike to 14.7 percent of the total loans by March 2021 in a worse scenario. In a base case scenario, the GNPAs could rise to 12.5 percent by March next year, the RBI said.
“Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 per cent under a very severely stressed scenario,” the RBI said.
The capital to risk-weighted assets ratio (CRAR) of banks edged down to 14.8 per cent in March 2020 from 15 per cent in September 2019 while their gross non-performing asset (GNPA) ratio declined to 8.5 per cent from 9.3 per cent, the RBI said. At the same time, the provision coverage ratio (PCR) improved to 65.4 percent from 61.6 per cent over this period, the RBI said.