Rishikesh Ramesh & Kandeep Shravan*
CoVID-19, better known as the novel coronavirus, hit the India. From the day 1 of lock down the Indian economy facing dilemma in various fields. The virus doesn’t leave the capital markets and Banking Industry. On 27th March, RBI reduced the repo rate by 75 bps and announced of three months on all term loan and credit card instalments due between 1st March and 31st May 2020. The announcement gathered a lot of interest as, initially, many believed that loan EMIs and credit card dues had been waived for three months. The moratorium, if availed of, will give short-term relief but will also cost borrowers dearly. This article focusses on Impact of moratorium, Interest and why government excludes NBFC from moratorium? However, this article discussed about the problem faced by borrowers and lenders during this pandemic situation.
WHAT IS A MORATORIUM?
As per the Oxford Dictionary Moratorium means a legal authorization for debtors to postpone the payment. A moratorium can be imposed either by a Government or by a Business. It is more of a response to a crisis that disrupts normal routine causing financial hardships. A soon as the issue is resolved, the moratorium will be lifted.
COVID-19 AND MORATORIUM
Since the borrowers might face a lack of liquidity during the nationwide lockdown to suppress the spread of COVID-19, the RBI on March 27 allowed financial institutions and banks to offer a three-month (90 days) moratorium on term loans and credit card bills to ease the situation and avoid a financial crisis. However, this will have serious repercussions on the Indian Economy. The RBI has permitted banks and other categories of lenders to framework this deferment which includes all kinds of loans including personal loans and credit card dues. The Moratorium cannot be seen as a waiver and is only a reprieve, as it is payable at a later date. (1)RBI has announced that all term loans including Agricultural, retail, crop term loans and loans under pool purchases are entitled to avail the benefit of the moratorium package. It is available accounts which are standard assets as on 1st March 2020. (2)
INCREASED INTEREST RATES
This moratorium can be seen as a stroke of luck for individuals whose income has taken a hit due to the outbreak and impact of the lockdown. The CIBIL score of the individuals who have obtained loans will remain unaffected as the non-payment of interest will not be seen as default during these three months. Nevertheless, at the end of the moratorium the interest can be seen a bit high, particularly for personal loans and credit cards. Additional interest will have to be paid for deferring equated monthly instalment (EMIs)to the respective lenders. And to pay this additional interest, there is an option either to increase the loan tenure without increasing the EMI amount or increase the EMI amount without increasing the loan tenure or if not both a one-time payment of the interest that accrues in March, April and May can be made in the June.(3) This very much impacts home loans as these long-term loans and the EMI’s form a substantial part of the monthly budget of an individual. The EMI for the moratorium period gets added to the outstanding principal amount, as a result the repayment from June onwards will be on the higher principal amount. Credit card loans will face a higher interest rate as they are unsecured loans and what must also be kept in mind is that credit cards can be used during the moratorium period only if the dues are cleared. (4)
It is very difficult for small finance banks to assess delinquencies. Small finance banks do not have a high proportion of current and savings account (Casa), unlike universal banks. Casa takes time to build, hence new banks offer a higher rate of Fixed Deposits. Banks have to match their assets with the liabilities. Hence if a bank sees an upswing in short term assets, it may offer high rates of FD’s for a short term. Most banks have paused loan disbursal as it a field related work. However few banks are trying to rework a process of offering loans without any face-to-face interactions. This is majorly done by banks which allow loans based on Aadhar based KYC (Know Your Customer) norms providing loans up to Rs.60,000 which is nearly 1.8 times the average size of usual microfinance loans which is Rs.35,000- Rs.38,000 hereby initiating an expedited digital service. (5)
The benefits can be availed certainly if there is a disruption in the class or there is a loss of income. Though the interest not mandatorily payable immediately, it gets postponed by 3 months. To give a clear perspective, an individual has a loan amount of Rs 100,000 and he is charged a 12% rate of interest on the loan, then every month he is liable to pay Rs. 1000 as interest. In case he does not want to pay the interest every month, he is liable to pay interest at 12% p.a. and accordingly he will pay Rs. 3030.10 at the end of 3rd month. Usually, if there is any delay or default in payment, it gets reported to the Credit Bureaus and for business loans of 5 crores and above, banks report the overdue position to RBI through Central Repository of Information on Large Credits (CRILC). No overdue payments post-March 2020 will be reported to the Credit Bureaus/ CRILC for three months as a result of this relief package. There will be no necessity of paying penal interest charges to banks. (6)
RECENT JUDICIAL PROCEEDINGS
A recent petition was filed in the Supreme Court seeking direction to the government of India and RBI in response the RBI’s circular released on March 27 on the three-month moratorium loan and RBI to waive off the accrued interest on term loans during the moratorium period of March 2020 to May 2020 by Amit Sahni. Theplea states that “State cannot enrich itselfnor permit anyone to enrich from the unfortunate situation by charging interest for moratorium period.” However, the petitioner clarified the intensity of the scheme and how it would affect the consumers by giving examples on how it would impact home loans and auto loans. For an Auto loan of Rs 6 lakh with a remaining maturity of 54 months, the additional interest payable would be Rs 19,000 nearly equal to an additional 1.5 EMIs.For a Home loan of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be nearly Rs 2.34 lakh equal to 8 EMIs.The plea also prays for the extension of the Moratorium. (7)
BANK VS. NBFC
After the collapse of IL&FS and DHFL, the non-banking finance companies (NBFC’s) have had a tough time to convince their investors and customers to regain the lost trust. Once again, these companies are finding themselves in a tough spot. COVID-19 has been current pandemic situation in the county. Under the RBI notification regarding loan moratorium/ EMI rules. As part of “Banking Institution” the NBFC’s comes under lending institutions which offers loan to their borrowers.
At the same time, NBFC’s are not eligible to avail the three-month loan moratorium offer from banks. This situation has put NBFC’s in a disputable position. The EMI deferrals to borrowers will mean that a short-term liquidity shortage even when they need to keep repaying loans to banks.
“NBFC’s face a double whammy because they are offering moratorium to customers despite not getting one themselves from their lender-banks. That will put significant pressure of many NBFC’s. By excluding the NBFC’s, will face liquidity pressure and finally increase of debt and it takes quarter to collect them. These NBFC’s have 2lakh crore debt obligations to others.
Unlike Banks the NBFC’s do not have systematic sources of liquidity and depend upon outside funding. These NBFC’s is the business where mostly they lend money as small loans to low income groups and MSME’s and which they are likely to get affected. As the impact occurs not only to borrowers but also to the NBFC’s because they have huge burden to manage the debt which suffers from repayment of loans. Thus, which makes the NBFC’s slowdown and will face situation like IL&FS and DHFL. The RBI need to safeguard and pay attention to the NBFC’s so that these institutions won’t fall into a liquidity trap.
The lenders will seek extension of the moratorium on loan repayments beyond June as part of a comprehensive package to support borrowers and revive the economy. Subsequently the prime minister Narendra Modi extended the lockdown till May. It may be extended due to the current situation. Some of the senior bankers have discussed the moratorium would get tougher for banks as the onus shifts to them to reactivate the economy. As per many Public sector banks the three-month moratorium is insufficient and the borrowers will need additional support for easing the rules and regulations for repayment. At this situation till now the NBFC’s not been included in the moratorium. Further, the confederation of Indian Industry is favouring NBFC for inclusion into moratorium and desired to bring under essential services category. The banks are included under essential services category, NBFC’s not. Moreover, they are not able to service MSME during the lockdowns. NBFC’s should be included in the definition of essential services.
Therefore, the RBI must take commercial decisions to extend moratorium to NBFC’s. RBI has to allow banks to show the loans as standard even for NBFC moratorium. RBI shall monitor NBFC’s to help government come with an economic package, if at all till the lockdown period.
The core point is to include NBFC in moratorium and pass sufficient benefits to other lenders. Every lenders and officials want to include NBFC in moratorium but the government is turning out and blows away NBFC’s out of moratorium. Since, the NBFC’s have sold many loans. the biggest buyers of loan pools, and mutual funds, who buy these against future receivable or loan repayments, will have the final say. On their part, NBFCs are ready to help borrowers who may not be aware that their loans have been sold. However, the lenders may not to be able to do so in the case of the loans securitised unless banks give their consent. If NBFCs go ahead without the green signal from banks, it would amount to breach of contract, analysts said. This would potentially be treated as default, going against the spirit of the RBI’s circular, which aims to give temporary relief to borrowers impacted by the COVID 19-related lockdown. For now, hoping the NBFC’s to be included in moratorium and provide adequate benefit to other lenders.
1. Bavadharini KS, (March 30, 2020), All you wanted to know about moratorium period, https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-moratorium-period/article31210477.ece#
2. Sunil Mehta, Chief Executive, India Bank’s Association, (April 3, 2020) RBI loan’s EMI Moratorium proposal for borrowers: Here’s all you need to know, https://economictimes.indiatimes.com/wealth/borrow/rbis-loan-emi-moratorium-proposal-for-borrowers-heres-all-you-need-to-know/articleshow/74913557.cms
3. Navneet Dubey, (April 9, 2020), Which bank is giving automatic loan moratorium and which is not: Here’s the list, https://economictimes.indiatimes.com/wealth/borrow/which-bank-is-giving-automatic-loan-moratorium-and-which-is-not-heres-the-list/articleshow/75022990.cms?from=mdr
5. TineshBhasi, (April 13, 2020), Delinquencies likely to rise once the moratorium gets over: Nitin Chugh, https://www.livemint.com/companies/people/delinquencies-likely-to-rise-once-the-moratorium-on-loans-gets-over-nitin-chugh-11586796061735.html
6. Sunil Mehta, Chief Executive, India Bank’s Association, (April 3, 2020) RBI loan’s EMI Moratorium proposal for borrowers: Here’s all you need to know, https://economictimes.indiatimes.com/wealth/borrow/rbis-loan-emi-moratorium-proposal-for-borrowers-heres-all-you-need-to-know/articleshow/74913557.cms
7. Debayan Roy, (April 11, 2020), State cannot enrich itself during Health Emergency: Plea in Supreme Court to waive off Interest on 3 months Moratorium Loans by Banks, https://www.barandbench.com/news/state-cannot-enrich-itself-during-health-emergency-plea-in-supreme-court-to-waive-off-interest-on-3-months-moratorium-on-loans-by-banks.
*Authors- Rishikesh Ramesh & Kandeep Shravan are students of ‘ SASTRA University’