“Moratorium is a legal authorization given to the debtors to postpone the payment of their debt”.
In lieu of Covid-19 (novel corona virus), the Government of India had imposed lockdown all over the country which led to the great fall in the economy. For the survival of our economy the Reserve Bank of India on 27th march, 2020 slashed Repo rate by 75 basis points and announced moratorium on all term loan instalments and credit card instalments for 3 months from 1st march to 31st may. This means, every borrower who opts for this relief need not pay any of their loan instalments or credit card instalments for those 3 months. Later it was extended till 31st August due to the extension of the nationwide lock-down. This article is going to take you through the process of how this step of the RBI will affect our economy, banks and the impact it would cause on the borrowers who are eligible and has opted for this relief.
EFFECTS OF MORATORIUM:
The moratorium announced by RBI is 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”). It is a temporary relief for the borrowers but in a long run it could cost them more than what was anticipated. Initially when moratorium was announced for the first three months roughly 33% borrowers had opted for this relief though most of them did not actually require. But since the lockdown was extended and the moratorium period has been extended for another three months it is likely that the borrowers who had opted for relief for the first three months might opt for it again and other borrowers who did not opt before would opt for it too, due to the cut in the salary and lack of employment. The few main sectors which faced the hard hit were the aviation, tourism, hospitality, transportation and media.
THE MAIN REASONS THAT LED THE BORROWERS OPTING FOR THE RELIEF :
- Lender gave automatic relief. ( 3% of the total borrowers)
- Facing a cash crunch. ( 41% of the total borrowers )
- May lose job or face salary cut in the near future. ( 23% of the total borrowers )
- Simply to conserve cash though not facing financial problem.( 33% of the total borrowers)
We can see that most of the borrowers are opting for the relief out of fear of uncertainty and with minimal knowledge of the repercussions in the future. One out of three borrowers are opting for moratorium for more than one loan, which can create some serious issues for the borrowers in the future as the moratorium is just a deferral and not a complete waiver of the instalments. The lenders will charge on the unpaid instalments after the moratorium is lifted, which will have a higher compounding effect. The borrowers should seek relief on the basis of the type of loan and the remaining tenure period, different loans costs different interest rates and longer the tenure period remaining, higher will be the cost that has to be borne by the borrowers in the future as interest forms a higher portion of the EMI during the initial period of the loan. “Even a single missed payment early in the loan tenure compounds into a big liability with time,” remarks Adhil Shetty, CEO, BankBazaar.
For example, if a person has availed a loan of 50 Lakh Rupees at 10% for 10 years and has paid already paid 13 EMIs, if the person opts for the relief for 4 months, the interest would compound to add 6 extra EMIs to be paid in the future and such extra interest payable would amount to 3,94,932 Rupees, if the person opts for moratorium for all the 6 months, the interest would compound to add 10 extra EMIs and such extra interest payable would amount to 6,26,851 Rupees. Hence, higher the moratorium period, higher would be the number of EMIs added and higher would be the interest amount payable.
There are online calculators which the banks and financial portals have come out with to compute the interest cost of the moratorium, which the borrowers can use to check the cost before opting for the relief and opt for it only if it is unavoidably necessary.
The banks have adopted two different mechanisms (Opt-in and Opt-out) to provide the borrowers with the moratorium relief, Opt-in approach is where the borrowers are given an option to opt for the relief and until they choose to opt for the relief the loan will carry on as before. In Opt-out approach the borrowers are not given any option, the relief is applied to all the eligible borrowers and upon all the loans, unless the borrowers specifically opts out of it. And this approach would cause unnecessary burden to those borrowers who are not facing any cash crunch, especially now when the moratorium period has been extended for another three months.
EFFECTS ON BANKS, FINANCIAL INSTITUTIONS AND NBFCS :
Moratorium has been imposed before since 1999, and it had its effects on those particular banks upon which it was imposed. The aim of RBI when it imposed moratorium on those banks was to safe guard the borrowers from the impact of the losses incurred by such banks. Now the moratorium has been imposed on all the Banks, Financial Institutions and Non – Banking Finance Companies and, these Non – Banking Finance Companies are the one facing a major double impact. Like individual borrowers NBFCs also borrow from banks, but such borrowed money is again used for lending to their borrowers. But unlike individual borrowers NBFCs are not provided with the moratorium relief, RBI left that decision for the banks to decide and the banks felt that if moratorium was allowed to the major borrowers of the banks it would lead to accumulation of dues and make the debts unsustainable.
Non – Banking Finance Companies operate with very little short term liquidity and as checked by the banks most NBFCs had sufficient on-balance liquidity to manage the first three months of moratorium, hence did not require the moratorium relief. But now, when the moratorium period has been extended till 31st August, it is unlikely for the them to survive another three months without the moratorium relief. Hence, the government and RBI have announced various developmental and regulatory policy measures for NBFCs to meet the required liquidity. Many banks have extended credit lines for them to meet their liquidity requirements but are not comfortable to provide them with moratorium relief. Though credit lines can give the NBFCs a short term relief, its not an adequate solution for them. According to the NBFCs the banks are comfortable to extend even credit lines only to the High-rated NBFCs, which again filters through the system as the smaller NBFCs borrow from such high-rated ones, as a whole all the NBFCs face a major irrecoverable impact. To help in the survival of these Non – Banking Finance Companies the RBI asked the Banks to consider issuing moratorium relief, at least, on a case-to-case basis. But the banks feel that the government policy measures can take sufficient care of the Non – Banking Finance Companies and their liquidity requirements.
WHAT IF THE INTEREST DURING MORATORIUM IS WAIVED:
In an ongoing case Gajendra Sharma vs Union Of India, a writ petition regarding waiving the interest on loans during the moratorium period was filed before the Hon’ble Supreme Court of India by Gajendra Sharma on 17th June, 2020. The matter was heard by a three-judge bench led by Hon’ble Mr. Justice Ashok Bhushan, and comprising other two judges Hon’ble Mr. Justice Sanjay Kishan Kaul and Hon’ble Mr. Justice M.R. Shah. It was argued by the learned council for the petitioners that although moratorium has been granted to the borrowers but per se no substantial relief is actually given to them. It was requested that principal amount and the interest to be paid during the moratorium period needs to be waived or at least the interest amount could be waived to provide the borrowers with some actual relief.
The RBI and Finance ministry disputed against the petition, saying that the banks and it’s borrowers are under a contract, and the banks also have an obligation to pay compounding interests to its depositors. In a situation like the Covid-19 pandemic, if the interest payable by the borrowers during the moratorium period is waived it could cause financial instability and other ramifications not only to the banking sector but the economy as a whole. Hence, it is not advisable to grant waiver on the interest amounts payable. The Indian Bank Association and State Bank of India also argued that the banks will have to look in case to case basis or sector wise, before considering payment deferral, but providing relief to all the borrowers in all cases is not acceptable.
The government chose not to interfere between the banks and its customers. But the bench suggested that the government cannot just choose not to interfere, it suggested that the government could bear the interest amount payable during the moratorium period or if such relief could be given at least to the distressed sectors. Further, it said that it is the responsibility of the government to ensure that the borrowers receive the proper relief for which the moratorium scheme was announced. The case will further be heard on the first week of August after all the appropriate details regarding the moratorium scheme and other relevant documents are brought before the Hon’ble Court.
WHEN WILL THE ECONOMY REVIVE ?
According to the Reserve Bank of India, if no such waiver is passed by the Hon’ble Supreme Court and no further nationwide complete lock-downs are imposed, in the second quarter of the accounting year the economic activity is still likely to be subdued because of the social distancing norms and shortage of labour. But by the third quarter it might be possible to see the economic activities starting to recover and by fourth quarter, if there are no uncertain ramifications and hopefully the pandemic is under control or people learn to live with this pandemic, there can be a gain in the rate of recovery, as the supply lines would be restored to normalcy and the demand might gradually revive too.
Moratorium is a strategic scheme and only the borrowers facing a serious cash crunch should even consider opting this relief, as it could mislead the borrowers into a financial complication, if opted without proper knowledge. It is the obligation of borrowers to repay their loans, and moratorium is just a deferral. It is important that the borrowers have full knowledge of what they are getting into before opting for the relief, since it will not only affect them, later in the process, but will also affect the banking industry, resulting into a fall in the economy as a whole. By far one third of the borrowers have already opted for the relief and the numbers are seemingly increasing, it is the responsibility of the banks to make their borrowers understand what moratorium actually is. If the number of borrowers opting for the relief don’t fall it could cause another Global Financial Crisis as suffered in 2008, as there is a possibility that 70 – 80 % of the moratorium loans could go bad later in the future as said by Macquarie’s Suresh Ganapathy. Therefore, if the borrowers are not facing a cash crunch in these months, it is ideal for them to pay their instalments without the help of moratorium. It could even help in the survival of the Non – Banking Finance Companies who are currently facing a double impact due to moratorium, since they might have a decent cash inflow in such as case, as compared to the current situation.
 Nikhil Agarwal, RBI cuts interest rates, extends loan moratorium by another 3 months, (22 May 2020), https://www.livemint.com/industry/banking/rbi-governor-shaktikanta-das-press-conference-live-updates-rate-cut-extension-of-moratorium-on-loans-11590119745407.html
 Reserve Bank of India Notifications, (27 March 2020), https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835&Mode=0#
 Sanket Dhanorkar, How taking loan moratorium will impact your future EMIs, (09 June 2020)
 Jyotika Sood, Before Yes Bank, Moratorium Was Imposed On These 8 Banks Since 1999, (06 March 2020) https://www.outlookindia.com/website/story/business-news-before-yes-bank-moratorium-was-imposed-on-these-8-banks-since-1999/348350
 Vishwanath Nair Advait Rao Palepu, RBI’s Loan Moratorium Extension May Bring More Pain For NBFCs, (22 May 2020) https://www.bloombergquint.com/business/extended-moratorium-may-bring-more-pain-for-nbfcs
 FE Bureau, Supreme Court: Consider interest waiver during moratorium, (18 June 2020) https://www.financialexpress.com/economy/supreme-court-consider-interest-waiver-during-moratorium/1994857/
 supra note 1