loan moratorium: the extension of the loan moratorium has two components; the second is ugly for banks

The 40 basis point cut in the repo rate was the need of the hour, given depressed economic activity and collapsing demand. Another RBI rate cut was more or less priced in and as a result Indian 10-year sovereign yields fell just 10 basis points. Nevertheless, stock markets expected more from banks in terms of additional open market operations, respite for banks that would not have to mark-to-market (MTM) their held-to-maturity portfolio (HTM ), etc.

Unsurprisingly, bank stocks are down in trade. Although this announcement was not a bazooka like previous policy measures, there are positive measures such as the extension of the moratorium on term loans and an increase in the business loan limit.

For the banks, the extension of the moratorium for an additional three months has two sides. A clear picture of the quality of lenders’ assets will now only emerge in March 2021, rather than September 2020. There is a risk that the moral hazard problem will set in, as borrowers who have the ability to pay can even opt for a moratorium. And for MFIs and NBFCs that cater to bottom-of-the-pyramid clients, the risk of repayment behavior being disrupted is higher.

On the positive side, the extension of the moratorium gives customers (Professionals, Small Businesses, MSMEs and Enterprises) more time to recover their income/repayment capacity in an easing lockdown scenario. So the likelihood of them slipping buckets after the moratorium ends on Aug. 31 decreases, and therefore the peak NPL for lenders could be lower than what is expected now.

The extension of the moratorium also gives lenders time to strengthen their collection infrastructure for retail products, as restrictions on physical collection/tracking ease and collection agencies would have brought back their migrant workforce.

For working capital facilities, interest payments have been deferred for an additional three months, in line with the extension of the moratorium on term loans. Interest accrued for the deferment period may be covered by a capitalized interest term loan payable before the end of the current fiscal year. Thus, borrowers do not need to pay accrued interest all at once immediately after the deferment period, which is a great relief for them.

We expect a greater policy response from the RBI going forward in terms of further rate cuts and OMO to lower the yield curve, possibly even some monetization of government bonds.

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