RBI must permit loans to be restructured: Expert View

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The moratorium on term loans first announced by the Reserve Bank of India (RBI) in March 2020, following the Covid-19 pandemic, ends on 31 August 2020 and has been extended by May 2020 for a further three months. As industry leaders’ clamor for enlargement and banks oppose it just as vehemently, the issue of further moratorium extension has become highly contentious. When RBI Governor Shaktikanta Das and members of the Confederation of Indian Industry (CII) interacted on 27 July 2020, HDFC Ltd Chairman Deepak Parekh was emphatic that any further extension would hurt intermediaries in the financial sector, particularly smaller NBFCs.

Parekh ‘s point was that borrowers who should pay will not pay, use the moratorium, and delay payments. His words echoed the sentiments expressed earlier by the Chairman of State Bank of India, Rajnish Kumar, who had expressed the view that the moratorium was not to be extended.

Rakesh Mittal, managing director, Bharti Enterprises, on the other hand, was no less emphatic that failure to extend the moratorium would lead to an increase in non-performing assets (NPAs).

Mittal has cautioned against the increase in the NPA ratio from 8.5 percent in March 2019 to 12.5 percent in the baseline scenario by March 2021, and 14.7 percent in the ‘substantial stress” scenario and is a tough consideration for RBI, as it did in the context of the RBI’s latest Financial Stability Report

It’s not too long to make a call. The moratorium could still be a month off, but the Committee on Monetary Policy is expected to meet on 4 August. In the Development and Regulatory Policies section that is part of the Bank’s Monetary Policy Statement, RBI usually makes decisions such as whether or not to continue the moratorium.

And what is RBI supposed to do? Firstly, it should be made clear that it was never intended for the moratorium to constitute an overall RBI order for banks to give the borrowers a moratorium. The regulator placing the ball squarely in the court of borrowers was an enabler, a hesitation. Provided that a moratorium would be allowed, the classification of properties would be prevented.

Therefore, the demand from Parekh is here and there. Lenders are not obliged to grant a moratorium even today. They are free to grant or deny according to their assessment of the case ‘s merits.

For their part, lenders know well that a moratorium is not an exception, it is just a tool for short-term cash management in times of stress.

The request from borrowers to extend moratoria, on the other hand, has some validity, even if bankers are constrained in the sense that if RBI withdraws its regulatory abstention, they would not be able to grant a moratorium and thus to ease the stand-off in the classification of properties.

Yet this does not mean that the moratorium will be extended by RBI. Today the ball is the court of the RBI.

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