Retail borrowers have been the backbone of the Indian banking system with their stellar repayment track record. The counterweight provided by retail borrowers has kept the system afloat even as it is awash in the sea of red ink caused due to the defaults by large corporate borrowers.
The wide spread job losses and closure of many small businesses mean that the mainstay of Indian banking is also in stress. Just like the corporate borrowers, the extent of default by retail borrowers will become known only after the moratorium period ends on August 31, 2020. Retail borrowers have always been taken for granted just like the proverbial spouse. A case in point is the rather casual mention of personal loans in RBI’s circular, leaving it to the respective bank boards to work out resolution plans.
Resolution plans for repayment
Though not clear, it seems that the expert committee may not have an active role in defining the parameters of such resolution plans for personal loans.
RBI’s circular restricts the mode of resolutions in the case of personal loans. “The resolution plans may inter alia include rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years. Correspondingly, the overall tenor of the loan may also get modified commensurately,” says the circular.
Borrowers whose incomes (whether self employed or salaried) have been permanently impacted by COVID-19 are unlikely to be able to make use of any of the resolution modes specified by the RBI, unless significant concessions are made. The only half useful mode among them is a two-year (maximum) moratorium.
The amount of loan as a percentage of the cost of home has always been on the lower side. Unlike their western counterparts, home loan borrowers in India have aggressively prepaid their home loans whenever they could. Hence, the loan amount outstanding as a percentage of the home value is low despite the recent fall in real estate values. This surplus can be used by borrowers for a fresh start if they sell their homes.
To maximise the capital available for the fresh start, they will need concessions in interest, not just postponement of payment dates. At the very least, lenders must offer a write back of excess interest charged by them (lenders) due to the outdated base rate or marginal cost of lending formula. This can be done as part of the arrangement where the lenders allow existing borrowers to use the lender’s platforms to sell their homes to buyers who can become new borrowers for the lender. This is akin to a “change of management,” under which banks can offer concessions to corporate borrowers. This is a win-win for all concerned. The lender’s balance sheet does not shrink, and the risk rating of the new borrowers is higher. The existing borrowers becomes debt free and they have a higher starting capital due to the concessions. The new borrowers get to buy the home they wanted to.
But bank boards are unlikely to approve such plans unless the blueprint is approved by the regulator. Even if a couple of banks do approve such programs, it would still be a piecemeal effort with limited impact.
Retail borrowers are in now in stress and deserve a helping hand.
I will stick my neck out and make a prediction – the stress in retail loans is currently not visible because of the moratorium. That kind of stress cannot be handled by the standard remedies prescribed by RBI for personal loans. I think we will soon see another committee, exclusively to address the stress in retail loans. I will be extremely happy to be proven wrong on this one.(The writer is CEO of Fee Only Investment Advisers LLP a SEBI registered Investment Adviser)