The case for an extension of the bank loan moratorium, announced around end-March and extended until 31 August, is non-existent.
This is not only because some of the big bosses of banking, from State Bank of India’s Rajnish Kumar to HDFC’s Deepak Parekh have suggested an end to the moratorium, but because it is simply going to make things worse if not done.
It is a moral hazard we cannot afford just when the economy is being steadily reopened, and growth is picking up in several sectors. Unlock 3.0 from 1 August, which further eases movement and reopening curbs, will rev up the economy even more. This is the time for beginning repayments, not further loan concessions.
This is not to minimise the pain and losses incurred by micro, small and medium enterprises (MSMEs) and retail borrowers of home and automobile loans. But an extension runs the risk of converting a scheme intended to provide temporary cash flow relief during the Covid-19 lockdowns into an unforgivable, taxpayer-funded bad loan mela. The longer the moratorium persists, the more likely that large parts of banks’ loan portfolios will become bad loans, needing extensive writeoffs.
Ending the moratorium does not mean good-quality MSMEs will be asked to carry the can. Banks can, based on their own assessments of risk and chances of revival, be allowed to reschedule loans by providing proper capital backing for it. But this has to be done case by case, not in general.
The truth is the vast majority of borrowers have continued to service their loans despite the offer of moratorium. This is largely the case with the home and auto loans extended to the salaried classes, but even in the case of MSMEs, the majority have been servicing their loans. (Read here and here)
According to V Vaidyanathan, managing director and chief executive officer of IDFC First Bank, the number of borrowers seeking moratoriums has been steadily falling over the past few months.
The Economic Times quoted him as saying: “We have liberally provided moratorium to customers who sought it, and our moratorium was about 45 percent last quarter; this has reduced to 28 percent now, which we expect to fall below 10 percent by 31 August 2020, based on the strong improving trend in collections we are experiencing.”
The case of IDFC First Bank is important because it has focused largely on bankable MSMEs and retail loans. So, its performance is more indicative of ground reality than the experiences of the state-run banks and also the big private banks like HDFC, ICICI, and Axis.
It would thus be a folly to convert an improving situation into one where more unsustainable loans are endlessly provided to deadbeat MSMEs earmarked for euthanasia. This may sound harsh, but creative destruction is what keeps even the profitable MSMEs viable.
There are three other reasons why extending the moratorium is a bad, bad idea.
One, it is tantamount to postponing the day of reckoning to the last quarter of this year. As long as the moratorium lasts, banks are given regulatory forbearance on recognising bad loans. This is one reason why most banks have announced reasonable results in the April-June quarter, which bore the brunt of the Covid-induced business shutdowns.
The second quarter, which includes July, August and September, may also be okay, since two months are covered by the moratorium and regulatory relief — assuming the moratorium is not extended.
This means all the bad loans will start tumbling out of the closet only from the third and fourth quarters, most probably in the fourth. That means humongous amounts of capital will have to be raised in 2021 calendar. It will cost the government more than what it will cost now.
Two, as economic activity revives, repayments of both principal and interest will accelerate. If this is not encouraged by ending the moratorium, more companies will slide into situations where their loan burdens bloat to the point where they will die anyway.
This happened in the past, when large, largely, recoverable loans to big business houses were allowed to be endlessly recast, making the ultimate size of the overdues unmanageable. We should not allow this to happen with so many retail and MSME borrowers. Rescues must be selective.
Three, the lending cycle of banks cannot resume unless there is some reverse flow of cash back to the banking system from borrowers. Otherwise, we are heading for a bad loan mela which only government can bankroll.
The reality is clear: the moratorium has to end in August. Extending it would be like kicking the can down the road. This was the mistake the Narendra Modi government made in its first term, when bank recapitalisation and bad loan recognition got delayed and pushed back, and the cost of rescues crippled lending and constrained the fisc.
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