If you were facing severe cash crunch due to the Covid-19 impact on your life and finances, the RBI has helped you put the worries on the backburner for a while. The central bank has extended the loan moratorium period by another three months to August 31. This is the second phase after providing a moratorium on all term loans due between March 31 and May 31. The moratorium, also referred to as EMI pause, was for three months at first. But the extension makes the moratorium a 6-month affair. It possibly underlines how deep and prolonged the economic recession will be. Moratoriums are not encouraged by lenders, either banks or NBFCs. There is a strong feeling that moratoriums have the power to weaken the painfully built credit culture. It is argued that a portion of borrowers gets so used to not paying EMIs that they end up not repaying even when the moratorium ends. As a result, bad loans rise, hurting lending profits. For a stock market like India, where a good part of benchmark indices weight lies in financial stocks, moratorium is a double-edged sword. Relief needs to be given where possible, but that too has a cost. But when the central government and the central bank announce such measures, lenders have no excuse not to comply. Does a long moratorium weaken banks and NBFCs? We try to look for answers in this article. Read on.
Chain is only as strong as its weakest link
The RBI had earlier, on two separate occasions (March 27 and April 17, 2020), announced certain regulatory measures pertaining to (a) granting of three months moratorium on term loan installments; (b) deferment of interest for three months on working capital facilities; (c) easing of working capital financing requirements by reducing margins or reassessment of working capital cycle; (d) exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies; (e) extension of resolution timelines for stressed assets; and (f) asset classification standstill by excluding the moratorium period of three months, etc., by lending institutions.
In view of the extension of the lockdown and continuing disruptions on account of Covid-19, the above measures were extended by another three months from June 1, 2020, till August 31, 2020, taking the total period of applicability of the measures to six months (i.e. from March 1, 2020, to August 31, 2020).
The EMI moratorium gave borrowers some breathing room. But the income loss, employment loss and fragile repayment capacity meant that many borrowers were in a situation where they could not repay on time. The 1st moratorium for three months came on time for those. Since the moratorium meant that interest will still accrue, the lenders discouraged many from unnecessarily opting for moratorium. Some lenders tweaked norms in such a way that only good borrowers could be eligible for moratorium.
Now, there is another three month moratorium. Already, many borrowers have availed the moratorium. State Bank of India (SBI) chairman Rajnish Kumar has reportedly said that close to 20 per cent of the bank’s borrowers have availed the moratorium. Bank of Baroda’s MD & CEO Sanjiv Chadha has reportedly disclosed that approximately 90 per cent of eligible customers of the PSU bank had elected to use the moratorium. For ICICI Bank, the number is about 30 per cent. For home finance company like HDFC, approximately 26 per cent of loans under management have opted for the moratorium. Individual loans under moratorium account for 21 per cent of the HDFC’s individual loan portfolio. Lending institutions with more self-employed customers have larger proportion of under moratorium loans. For instance, according to Emkay, nearly 60 per cent of DCB Bank customers by value have opted for moratorium given DCB Bank’s main customers being self-employed. These are just examples to show the uptake of the EMI moratorium scheme.
A drowning man will clutch at a straw
For borrowers, a moratorium is important for financial survival. Given that the economy is under lock-down, retail borrowers and institutional borrowers face a massive problem. The Indian economy is hardly back on its feet. Domestic economic activity has been impacted severely by the two months lockdown. The top-6 industrialised states that account for about 60 per cent of industrial output are largely in red or orange zones, according to the RBI. High frequency indicators point to a collapse in demand beginning in March 2020 across both urban and rural segments. Electricity and petroleum products consumption – indicators of day to day demand – have plunged into steep declines. Since business is down, repayment potential of borrowers at its nadir.
So, the move to extend the moratorium makes sense in the backdrop of a situation that shows no signs of improvement. Murali M Natrajan, Managing Director & CEO, DCB Bank, said: “In our view, the second moratorium relief has come at the right time because lock-down restrictions are being reduced so cash flows in the economy should start to pick up enabling customers to service their loan obligations more easily post the moratorium period.”
But can banks and NBFCs tolerate another three months of no repayment inflows? It appears that the lenders have to be selective. Till now, banks have cut their MCLR by 30-75bps since October as against 140bps cumulative repo rate cut by the RBI (including May 22), indicating weak policy transmission. The transmission of RBI’s May 22 rate cut would also be limited, with banks already under margin and asset quality pressures, while room to cut deposit rates (TD/SA rates) too is diminishing. The risk to banks’ margins is coming up fast. Only banks with a strong liability profile and relatively higher share of fix-rate portfolios will be in a position to cap the risk on margins.
“Bankers indicate that instead of the 3M moratorium, forbearance on asset classification or selective restructuring (mainly for SME) would have been a better solution, with business activities resuming gradually. Longer moratoriums are acceptable for long-tenure loans like mortgage, but not for short-tenure loans, and also disrupts credit discipline even for relatively good customers in the long run,” points out Anand Dama, analyst, Emkay.
Unlike the first round, banks will now be extending the moratorium selectively (1m-3m) basis to new/old customers, while good customers too will be reluctant, given the higher interest cost and some pick-up in business activity.
A leopard doesn’t change its spots
Bankers believe that salaried class, which was relatively reluctant in the first round, may opt for a moratorium in the second round due to rising job losses/pay cuts.
Moratorium behavior from corporates was mixed in the first round, with even good rated corporates availing moratorium, but may not take the extension.
Collection from MFI borrowers still remains slow due to restriction in conducting center meetings and thus, banks may selectively extend a short moratorium on need basis in specific areas, says Dama of Emkay.
The longer moratoriums also risk the rise of bad loans, called NPAs (non-performing assets). Large banks have already reported loan moratoriums, ranging from 25-30 per cent till now. Small banks have given higher moratorium in SME, MFI and VF space.
Banks created nearly 10-100bps Covid-19 related contingent provisions in Q4FY20, including regulatory provisions on SMA 2 loans benefiting from asset classification sensing incoming asset quality risk and likely credit cost.
Some experts believe that the extended moratorium may be counterproductive to some extent for banks and elevate NPA risk once the moratorium ends, particularly in retail and SME sectors, calling for higher credit cost. The SME guarantee scheme under the economic package, with many caveats and poor track record of honoring guarantees by CGTSME, has upset bankers to some extent.
Bankers demand for allowing one-time restructuring for SMEs has been not met yet, while some believe that chances of any such restructuring have faded with the moratorium extension.
The moratorium extension announced by the RBI to hurt securitisation market, says ICRA. While the extension would provide relief to many retail borrowers, if incorporated by the lending institutions, it would be detrimental to the securitisation market which has been a key funding source for the non-bank financial institutions (NBFCs, HFCs and MFIs). As per ICRA note, with no cash flows expected until August from loans under moratorium, investments in purchase of such loans will dry up. Investors may also take time to rebuild their confidence in the collection efficiencies of originators as the consumer behaviour towards loan repayments may also be impacted due to the long moratorium period. Consequently the securitisation volumes are expected to be significantly low in H1 FY2021, as against Rs1.1 lakh crore raised in H1 FY2020, as investors will be more cautious on the performance of retail loan pools for the near term.
Abhishek Dafria, vice-president and head (structured finance ratings) at ICRA, says: “Liquidity pressures on NBFCs, MFIs and HFCs would also grow as securitisation has been a key funding source in recent years with certain originators having an off-balance sheet portfolio of as high as 30 per cent of their total assets under management. Having said that if the economic revival was to be sharper with businesses resuming operations and the lockdown ending effectively, we may find lesser borrowers opting for the moratorium that could support the securitisation market.”
An ounce of protection is worth a pound of cure
NBFCs are worried. Unlike banks, who have deposit sources, NBFCs are totally dependent on banks. This puts NBFCs in a spot of bother. “For banks and NBFCs, moratorium may lead to an increase in NPAs in the long term and it would have been better had RBI also announced directions on one-time restructuring of loans and other support measures. Key continues to be implementation of various government stimulus fast and building confidence to lend especially to MSMEs,” says Bhavesh Gupta, CEO, Clix Capital.
Since the moratorium is also no free, costs pile up for small businesses, who actually are the lifeblood of the country. Says Hardika Shah, Founder & CEO, Kinara Capital, “the moratorium extension will help some MSMEs, but overall it will end up increasing the costs for small businesses who struggle to access capital. Clear guidelines on the applicability to NBFCs are still missing which will impact cash flow. The Moratorium could be effective if it is also extended to the NBFCs. However, clarity on this from the RBI is still lacking.”
Plus, the question about credit culture keeps the financial industry worried. Navneet Munot, ED & CIO, SBI Mutual Fund, said: “We reiterate that further relaxations may be needed for greater flexibility to lenders on one-time restructuring. Hasten to add, this is the crying need of the hour, we must keep an eye on hard-earned gains on the credit culture across all segments. It’s our collective responsibility.”
Once the moratorium is lifted, very few expect the borrowers to be diligent in repayment. “This will adversely impact repayment culture and spike in delinquency is expected after expiry of moratorium. Lenders will have to keep in touch with all customers particularly those on moratorium to suitably communicate them to begin repayment after expiry of moratorium,” notes Deo Shankar Tripathi, MD & CEO of Aadhar Housing Finance.
Banking, NBFC stocks outlook
In the last one year, the outlook on banking stocks and NBFC stocks has changed a lot. Banking stock like RBL have crashed 83 per cent between May 22 of 2019 and May 22 of 2020. Lakshmi Vilas Bank (down 83.80%), Indian Bank (down 82.10%), Yes Bank (down 80.70%), J&K Bank (down 79.30%), IndusInd Bank (down 77.70%), DCB Bank (down 73.80%) show the problem. Top lenders like HDFC Bank (down 30.2%), ICICI Bank (down 28.20%) and Kotak Mahindra Bank (down 22.4%) have shielded wealth erosion better. The first order of asset quality impact of Covid-19 will be seen in retail/SME, followed by another wave of corporate NPAs with demand for moratorium extension / forbearance / restructuring on the rise amid extended lockdowns. Thus, investors are better off staying with select banks with strong capital/provisioning buffers and healthy core profitability to absorb Covid-19-induced shocks.
In the listed NBFC space, 24 stocks are trading less than 10 per cent away their respective 52-week lows. This list includes the biggest NBFC like Bajaj Finance. Other prominent NBFCs like L&T Finance, Sundaram Finance, M&M Financial, etc. also are trading quite close to their 52-week lows. In the past one year, NBFCs have corrected quite a bit. The feeling on the street right now is that NBFCs are a lot more vulnerable than banks.
“Given the tough economic environment and the risk aversion in the system, we expect problems for the NBFC sector to continue. In addition, post lifting of the lockdown, it is unlikely that demand in key categories (housing, vehicles, etc.) would return to normal soon. We believe that FY21 would be a year to focus on liquidity and asset quality, rather than on growth and profitability. We prefer large NBFCs with stable funding sources, good parentage and a higher share of formal, salaried customers,” says Motilal Oswal Research.
The writer is a journalist with 14 years of experience