Banks Seek Another Moratorium | 21 May 2020

Why in News

The banking sector is pushing for a moratorium on loan repayments by another three months to 31^st August, easing of bad loan (Non-Performing Assets) recognition norms from 90 days to 180 days and one-time restructuring of loans as relief measures to tackle the impact of lockdown and the slowdown in the economy due to Covid-19 pandemic.

• These demands were raised at the recent meetings of the Reserve Bank of India (RBI) top officials with the chiefs of banks and Non-Banking Financial Companies (NBFCs).

Key Points

• Background:
  
  • On 27^th March, 2020, the RBI announced a three-month moratorium (1^st March to 31^st May) on loan and card repayments and slashed its main policy rate, Repo rate by 75 basis points and Cash Reserve Ratio (CRR) of banks by 100 basis points to stabilize the financial markets and reduce the pain on borrowers.
  • The RBI had stipulated banks should create a 10% provisioning on all loans that are overdue but not yet a non-performing asset (NPA) and where moratorium has been approved.
  • While the provisioning could be adjusted against the provisioning for slippages into NPAs during fiscal 2021, it becomes important to see how the banking sector manages asset quality in the near term post the moratorium period.
• Use of Moratorium Provision :
  
  • In the retail segment, higher instances of moratorium utilisation were observed in agri loans, micro-credit, commercial vehicle loans and other unsecured retail products like credit cards.
  • Several borrowers opting for moratorium had sufficient account balances indicating that borrowers want to be more liquid.
• Reasons Behind Demands:
  
  • Extension of moratorium is required as factories are unlikely to start production in May due to curbs in many important industrial belts, supply chains remain broken and job losses have increased.
  • It will imply companies need not pay till 31^st August, and it also implies almost minimal possibility of companies being able to pay their interest liabilities then in September, failing which the account might be classified NPA as per existing norms.
    
    • Currently, loans in which the borrower fails to pay principal and/or interest charges within 90 days are classified as NPAs and provisioning is made accordingly.
  • Banks want the NPA recognition limit to be raised to 180 days to limit the surge in NPAs.
  • Restructuring of loans will help in easing the interest burden on borrowers.
  • Also, bankers are not sure whether RBI will change its ‘June 7 circular’ concept on stressed assets and restructuring.
    
    • RBI’s Prudential Framework for Resolution of Stressed Assets June 7 circular, mandates banks to recognize stress and initiate a review of default within 30 days. The June 7 circular is stringent and gives little flexibility to banks.
• Negative Impact:
  
  • Extension means a delay in payment and borrowers will have to shell out the installments and interest charges later.
  • Banks are already facing sluggish credit offtake and a spike in non-performing assets due to the lockdown and the contraction in the economy.
  • According to Crisil ratings, NPAs are set to rise by 150-200 basis points this fiscal (2020-21).

Way Forward

• Banks and NBFCs have raised these demands as moratorium alone is not sufficient to come out of the crisis.
• The RBI needs to give operational flexibility to banks for a comprehensive restructuring of the existing loans and also a reclassification of 90-day norm.

Source: IE