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As lockdown extends, banks seek another 3-mth moratorium from RBI
May, 21st 2020

With the lockdown now getting extended up to May 31 and possibility of further extension not ruled out in some key states, the Reserve Bank of India (RBI) may have to extend the moratorium on loan repayments by another three months to August 31, bankers and analysts said.

Worried over rising bad loans, bankers are veering around the idea that extension of moratorium is required as factories are unlikely to start production in May, in view of the curbs in many important industrial belts, broken supply chains and increasing job losses. Banks are already facing sluggish credit offtake and a spike in non-performing assets (NPAs) due to the lockdown and the contraction in the economy.

On extending the moratorium beyond May 31, the chairman of a nationalised bank said, “Let’s wait till May 31 and then see that what is the demand or what is the situation, and depending upon the situation on the ground, I think these are the things which RBI can take a view and take a calibrated approach. I think the next view probably will be taken after May 31.”

On March 27, the RBI announced a three-month moratorium (March 1 to May 31) on loan and card repayments and slashed its main policy rate — repo rate – by 75 basis points (bps) and mandatory cash reserve ratio (CRR) of banks by 100 bps to stabilise the financial markets and reduce the pain on borrowers hit by the COVID-19 pandemic.

“With the lockdown now extended up to May 31, we expect RBI to extend the moratorium by three months more. This will imply companies need not pay till August 31, and almost minimal possibility of companies being able to service their interest liabilities then in September, failing which the account might be classified NPA as per extant norms,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.


Reclassification of 90-day norm, loan recast also sought

Many in the banking sector suggest the RBI needs to give operational flexibility to banks for a comprehensive restructuring of existing loans and also a reclassification of the 90-day norm. As of now, the June 7 circular is stringent and gives little flexibility to banks. According to analysts, the central bank needs to clarify whether enhanced working capital loans classify as COVID debt.

Rating agency Crisil said NPAs are set to rise by 150-200 bps this fiscal. “Lockdown will impact collections and resolutions, and thus result in higher NPAs. The gross NPAs would be between 11-11.5 per cent for the base case and it could rise higher,” it said.

Among the sectors, a Crisil metric on parameters of erosion in revenue growth and credit risk shows that auto components, real estate, gems & jewellery, airline, construction, poultry & meat, and textiles are the weakest positioned. However, the RBI has also stipulated banks should create a 10 per cent provisioning on all loans that are overdue but not yet an NPA and where moratorium has been approved.

Banks categorise such loans as special mention accounts (SMA) where loans are in the 0-90 days overdue buckets.

This provisioning requirement stipulated by the banking regulator has to be made over the two quarters of March and June 2020.

While the provisioning could be adjusted against the provisioning for slippages in NPAs during fiscal 2021, the banking sector’s ability to manage asset quality in the near term post the moratorium period remains a critical factor.

“As per our estimates, the RBI’s stipulation on additional provisioning requirements could increase the total provisioning of banks by Rs 35,000 crore in the March-June 2020 period,” said Vydianathan Ramaswamy, director of credit rating agency Brickwork Ratings,

Banks are offering moratorium to retail customers on a blanket ‘opt-out’ basis and to wholesale customers on case to case ‘opt-in’ basis. Even within retail segments, higher instances of moratorium utilisation were observed in agri loans, micro-credit, CV loans and other unsecured retail products like credit cards. For most banks, a higher proportion of the retail book appears to be under moratorium. Several borrowers opting for moratorium had sufficient account balances or undrawn lines, indicating that borrowers want to be more liquid (at a cost, of course), according to HDFC Securities.

There have been instances of eligible borrowers requesting moratorium retrospectively, asking for refund of payments to their accounts.

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