Sankar Chakraborti, Group CEO of Acuité Ratings & Research on Loan Moratorium with its Impact on Banks and NBFCs:
RBI's timely loan moratorium announcement has provided a significant relief to all those borrowers whose cash flows were severely disrupted due to the virtual cessation of economic activities on the back of a stringent nation-wide COVID lockdown from last week of March 2020. There is clearly no reliable data available on the moratorium burden faced by both banks and NBFCs. The estimates worked out by Acuité Ratings and Research suggest that it was around 42% for public sector banks and 30% for private sector banks in the first phase on an aggregate portfolio exposure basis. On the other hand, it was over 65% for the NBFC sector which mostly lends to self-employed borrowers and small enterprises.
However, there has been a steady decline in the proportion of borrowers under moratorium in the second phase (June - August 2020) primarily due to resumption of business activities, with easing of lockdown, borrower realisation of the accrued interest burden and also the efforts made by banks and NBFCs to pull out better customers from moratorium. Our estimates are that in the second phase the moratorium figures are roughly 30% for public and 20% for private sector banks, translating to an weighted average of 25% for the banking system as against 35% in the first phase. The reduction in the moratorium burden has been higher for the NBFC sector from the earlier 65% to around 45%. Specifically, for the retail borrowers in banks, the share of moratorium loans has come down from 60% in M 1.0 to 45% in M 2.0. As regards corporate borrowers, it has roughly declined from 25.0% to 17.5% for the banking sector as a whole. While the asset classification for the moratorium loans remain unchanged, the banks and NBFCs have started to make contingency provisions for such loans since it is likely that a certain proportion of these loans will turn delinquent and may need to be categorised as NPA in the near future. The provisions in each bank depend on their assessment of the risks.
Acuité believes that another extension of the moratorium may hurt the lenders for the following reasons; one, the clients with improving cash flows may continue to avail the moratorium and further the section of borrowers who have already started to pay may again seek moratorium, thereby impacting the expected improvement in collections. Secondly, a long moratorium beyond six months can impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments; another risk of providing a continuous moratorium is the likelihood of diversion of surplus funds which otherwise can be used for debt repayment.
In the opinion of Acuité, a one-time restructuring is a more prudent option at this stage when the economy is a partial recovery mode rather than a blanket moratorium applicable to all.