ARE LOAN MORATORIUMS A VIABLE SOLUTION TO THE ALREADY DISTRAUGHT BANKING SECTOR?: SOWJANYA S
Introduction- The Covid 19 had hit the
world economy the worst in recent decades. In India, the lockdown started in
March 2019 and continues till today. The Pandemic had affected the all spheres
of the economy and banking sector serves no exception. The World Bank perceives
that the “global economy will shrink by 5.2% this year”[1] and
states that ‘the shutdown measures to contain the spread of Covid 19 have
plunged the economy into severe contraction [2]’. In
this contemporary state of the global slowdown, the Reserve Bank of India on
May 23rd 2020, announced the extension of the moratorium on loan
payments till August 31st 2020.
Extension of Moratorium by RBI- In
General terms, Moratorium is “a period of permissive or
obligatory delay; specifically, a period during which an obligor has a legal
right to delay meeting an obligation[3]”. Usually,
Banks provide few months of the waiting period or moratorium period, during
which the EMI need not be paid. The best example is the Educational loans
sanctioned to students.
To
combat the distress caused by Covid 19, on March 27th 2020, the RBI
allowed Banks and other Financial Institutions to allow a moratorium period of
90 days. Again, the RBI vide notification dated May 23rd
2020 notified the ‘extension of moratorium by another three months i.e till
from June 1, 2020, to August 31, 2020’[4]. The RBI
stated that - “In view of the extension of lockdown and continuing disruption
on account of COVID-19, all commercial banks (including regional rural banks,
small finance banks and local area banks), co-operative banks, All-India
Financial Institutions, and Non-banking Financial Companies (including housing
finance companies) (“lending institutions”) are permitted to extend the
moratorium by another three months i.e. from June 1, 2020 to August 31, 2020 on
payment of all instalments in respect of term loans (including agricultural
term loans, retail and crop loans)[5].”
Impact
of extension of loan moratorium on the debtors- The
primary objective of these measures by the RBI is to ease the financial
liquidity of the debtors. But extension cannot be understood equivalent to
waiver or suspension. The debtors need to repay the loan after the extended
period with accrued interest. Therefore, by this extension either the term of the
loan or the interest accrued or interest to be paid in future increases. Thus
it will create an “interest on interest effect[6].”
Impact of extension of loan moratorium on banking sector- Banking sector is in a distraught due to the Covid 19
pandemic. The profitability index, cost of risk, asset and liabilities
management, credit management, customer relationship, high volatility in the stock
market had proven detrimental to the banking industry. Blanket extension of
moratorium shall, even more, disrupt the banking sector. The following are few of the
counterproductive effects of the extension-
1.
The banks
would not be able to develop appropriate credit facilities.
2.
Incremental
lending would change as a difficult challenge to the banks.
3.
The
liquidity of the banks would turn to be distraught.
4.
Increase in
Non Performing Assets
Further, the defaulters
before March 2020 might also adopt this scheme to postpone their dues. But the blessing in disguise for the banking
sector is the interest on interest factor.
Conclusion- The act
of extension of moratorium acts as a double-edged sword i.e it is a reorient to
the debtors and it cast high repercussions on the banking sector. Therefore, to
create a balance between the debtors and the banks, the best option is
financial discipline. That is, the objective of this extension is to protect
the debtors those who are seriously affected by Covid. For example, in the
hotel industry, the tourism industry had been affected deeply due to Covid. But
the industries catering to the essential facilities are running more profitable
than normalcy. Therefore enforcement of financial discipline might be a viable
solution for this problem. The debtors those who have the financial capacity to
repay the loans have to repay to ease the liquidity of the banks.
[1] COVID-19 to Plunge
Global Economy into Worst Recession since World War- II, (Aug 21, 2020, 1.27
Pm) , https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii.
[2] Id.
[3] Black's Law Dictionary 513 (4th ed. 1968).
[4] Notification, Covid 19
regulatory package, (Aug 21, 2020, 1.27 Pm), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11902&Mode=0.
[5] Id.
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