RBI s 3 Month Loan Moratorium Is It A Boon To The Borrowers -Rakesh Tulsiani

Under measures implemented to provide relief to the borrowers during the tough times of COVID-19 that shook the world economy by its core, RBI announced a 3-month moratorium on term loans and working capital payments. 

The RBI said, “In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (lending institutions) are permitted to grant a moratorium of three months on payment of all instalments falling due between March 1, 2020, and May 31, 2020.”

As soon as India’s central bank took this call on 27th March, many banks commenced the rollout of this fiscal measure even though they are not obligated to enforce this proposal.

Granting that the motive of this suggestion is to mitigate the financial mess sustained by debtors due to the Coronavirus pandemic, a few questions still need answering.  

‘Really an Advantage?’

The loan moratorium doesn’t mean a loan waiver. Economic experts suggest that this measure will rather be beneficial to the banks than the borrowers. 

If the borrowers avail this moratorium they will enjoy a repayment holiday for three months but on the downside, the tenure will be extended and they will end up paying a hefty sum as interest accrued on the outstanding loan principal. The customers will have to pay this small price if they want to be sheltered by this immediate relief. But the RBI encourages borrowers who aren’t facing any financial stress due to COVID-19 to proceed with their respective EMI payment.

This moratorium will have no impact on the credit score and credit rating of the borrowers if they choose to avail this facility. The borrower background is irrelevant here (whether a corporation or retail borrower) to the CIBIL or other credit bureau. However, after three months when the aid expires, if you fail to repay your dues it will be reported to the Credit Bureaus impacting your credit score and rating.

People with home loans, vehicle loans and credit cards are more likely to end up paying significantly higher interest dues after three months. Thus, it can be considered as a boon for people who are facing a financial crunch because of income disruption in these times.   

Many banks like PnB and BoI are rolling this out after their customers opt for the deferment after approaching the branch while others like IDBI have incorporated it by default.  

The chances of Liquidity squeeze!

All banks and lenders have been permitted by the RBI to structure this deferment. Many experts express concern that this attempt to insulate the borrowers could harm the lenders. The cash flow levels of banks and NBFCs can be impacted. But, Sunil Mehta, Chief Executive, Indian Banks’ Association (IBA), addressed some commonly asked FAQs and shed more clarity around the same.

He mentioned, “RBI has made provision for sufficient liquidity support to these Financial Intermediaries under recently introduced Targeted Longer-term Refinancing Operations i.e. TLTRO. Liquidity availed under the scheme by Banks has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.”

Banks will need to acquire fifty per cent of incremental holdings of eligible instruments from primary market issuances and another fifty per cent from mutual funds and NBFCs. There are other provisions which will ensure the banks stand firm and support other financial intermediaries without any risk of a liquidity squeeze.  

To Sum Up…

This welcoming move by the government during the pandemic is a bold step. This relaxation will offer assistance to many people who have lost their job or are facing pay cuts, to the retail borrowers, micro-enterprises as well as large enterprises in desperate need. But, this doesn’t stop here, the RBI is now set to rescue the state governments and exporters by relaxing the export repatriation limits. After the outbreak comes under control, the country will have to fight a long battle against economic challenges. Keeping the faith intact, let’s believe that the current steps taken by the government will benefit in future damage curtailment.

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