Making a mountain out of a moratorium

The spotlight on banks’ financial results this earnings season is perhaps stronger than it has ever been before. The first quarter of financial year 2020-21 is also the first one where the full impact of the pandemic will be felt. Investors are particularly interested in loans under moratorium on bank balance sheets.

Unlike lending institutions elsewhere, which can give a clearer picture about loan losses, lenders in India are unable to do so because the Reserve Bank of India has allowed borrowers to postpone loan repayments till August 31. So, a true picture of their balance sheets will emerge only when moratorium is over. RBI’s financial stability report released last week said that nearly half of all bank loans were under moratorium as on 30 April.

However, things have changed since then. One of the most frequently asked questions to Indian lenders on earnings calls now is what percentage of loans is currently under moratorium. But the answers in response to that question are far from uniform. To placate investors, some lenders may report that a high percentage of loans previously under moratorium have now ‘started being repaid’, but in the absence of far more detail, this is meaningless.

AU small finance bank, for instance, has referred to it ambiguously as 'customer activation', while Cholamandalam Finance has provided a more detailed breakdown of the number of EMIs repaid during each month of the moratorium, although the 'part EMI' column is still unclear. Axis Bank’s CEO stated that moratorium levels could potentially 'move up' going forward. Such updates are designed only to provide a semblance of control to investors struggling with the immense sea of uncertainty brought about by the pandemic.

Yet, it is clear that investors are heavily relying on this statistic in making their investment decisions. Reports refer to Bandhan Bank’s recent pre-earnings business update as passing with flying colours at least in part because “the moratorium availing customers…[is] down to 30% from nearly 100%.” The impact was tangible; the stock went up by 10.6 percent the next morning.

Such a reaction is understandable. The moratorium makes it hard for analysts to understand the true impact of the pandemic on lenders’ books, and opens up the possibility of a huge asset quality shock once the moratorium does end. In its recent report, the RBI themselves acknowledge that the outlook for the financial system is weighed down by the moratorium’s implications for asset classification, and that it is difficult to ascertain the impact accurately in such uncertain and evolving times.

Bankers and industry are split over a possible extension of the moratorium. Some want RBI to allow a one-time restructuring of loans. The impending Supreme Court judgement (due in August) regarding lenders’ ability to charge interest on loans under moratorium further complicates issues.

The apex court has already indicated that charging interest on loans under the moratorium would defeat the purpose of the moratorium. Interest forgiveness is not necessary to achieve the purpose of the moratorium which is to give borrowers some breathing space as their livelihoods have been upended by the pandemic. What might actually defeat this purpose is putting pressure on lenders to reduce the number of loans under moratorium.

Unfortunately, however, the regulatory overhang coupled with investor demands is compelling enough for lenders to seek to reduce the incidence of loans under moratorium. In phase 2, many lenders have switched from an ‘opt-out’ to an ‘opt-in’ approach. Given the rapidly reducing percentage of loans under moratorium that many have already reported, it appears that lenders are being aggressive to satisfy analysts who are expecting a continuous decline.

As with most other aspects of the pandemic, this is likely to most severely affect those at the bottom of the income pyramid. This may be why some MSMEs in Tamil Nadu are reportedly turning to moneylenders to make ends meet. Conversely, it is also possible that lenders are extending top up loans to troubled borrowers to enable them to repay their outstanding dues. In any case, evergreening loans to maintain the illusion of asset quality will not abate any incoming wave of credit losses.

To sum up, focusing heavily on an undefined statistic and putting undue pressure on lenders to demonstrate improving asset quality may not improve investors’ ability to make more precise investment decisions. Such pressure might backfire, worsening company performance over the medium to long term.

 Stuti Johri is an investment analyst. Views are personal.