RBI loan moratorium update

RBI loan moratorium update

Last updated: 04 Sep, 2020 | 03:27 pm

RBI loan moratorium update
  • The Supreme Court directed banks not to tag any loans that were standard as on 31 August as non-performing even if there is a default, till further orders. This effectively provides an interim extension of the loan moratorium to stressed retail and corporate borrowers
  • Earlier, the RBI had permitted the lenders to grant a loan moratorium for three months of EMI, falling due between 1st March 2020 and 31 st May 2020, to help borrowers mitigate the economic impact of Covid-19 pandemic. Later, RBI extended it for further three months till 31st August. Repayments were expected to begin on 1 September after the end of a six-month-long moratorium
  • This interim order will largely benefit borrowers who were on the brink of defaulting or were closer to the 90-day overdue mark, after which loans are classified as NPAs.

Profile of borrowers opting for moratorium

  • According to Crisil Ratings, the majority of the firms that have availed the moratorium are sub-investment grade. “Around 2,300 non-financial firms have availed the moratorium announced by the RBI. More than 75% of these had sub-investment grade credit ratings (BB+ or below) from Crisil,”
  • The number of mid-sized companies with a turnover of Rs 300 crore - Rs 1,500 crore opting for the moratorium is three times of those with a turnover of more than Rs 1,500 crore, as per the Crisil report. This indicates that the stress faced by small and medium-sized firms is much higher than their larger counterparts.
  • “Around 20% companies that opted for the moratorium are in highly impacted sectors such as gems and jewellery, hotels, auto components, automobile dealers, power utilities, independent power producers, energy traders, packaging, and capital goods.” These borrowers were from industries that were already facing a dent in their business performance due to the economic slowdown prior to the pandemic.

How much of the loan book is under moratorium for banks?

  • When the moratorium was announced initially, it was a cause for huge concern, as some banks including Bank of Baroda, Bank of India & Yes Bank had reported that more than 45% of their loan book was under moratorium
  • Loans under moratorium have declined from 31% of total outstanding loans in Phase-1 to about 18% as of Phase-2, recent data compiled by Jefferies Research shows 
  • This is attributable to borrowers starting to repay loans with the gradual opening of the economy. And also, banks being stricter in offering this moratorium to borrowers. The table below shows how much the loan book is under moratorium

The NPA picture of banks

  • Private sector banks and state-owned banks had an aggregate bad loan burden of ₹8.42 lakh crore as at the end of Q1FY21. According to ICRA, Gross non-performing assets (NPAs) of banks are likely to worsen to 11.3-11.6% by the end of this financial year.
  • The relief on the moratorium as well as the restructuring of loans by RBI will temporarily help Indian banks exposed to these sectors. However, the pain will be most apparent when stressed borrowers may not be able to pay back loans later, despite the restructuring. Right now all the pain seems to be brushed under the carpet! Given the financial profiles of the borrowers, the risk of NPAs rising in the long-term is even higher.
  • According to estimates by Jefferies, 30-60% of the loans in Phase-2 would have to be restructured, forming 4-8% of total loans (according to RBI’s restructuring scheme).  

INDmoney Analysis

  • The majority of loans under moratorium in phase two are carry-overs from phase one, indicating that the new stress is limited. However, the risk of continuing loans is naturally higher, as they have not been paid for 6 months, indicating that the borrowers are under high stress
  • While the loan restructuring scheme and the moratorium is a solid initiative by the RBI, it is pre-emptive of a significant deterioration of business environment in India.
  • Banks have been shoring up capital off late via various means to build reserves to tide through the crisis. Financial institutions will go through a rough phase over the next year.
  • Banks with strong capital adequacy ratio and loan books of healthy borrowers should be able to tide through these difficult times. Large banks have already braced for the worst and provided for the Moratorium. The provisions are expected to go up even further.
  • While the situation has improved as compared to Phase-1, with the spread of COVID gaining pace across the country, further shutdowns continues to be the biggest factor to impede recovery
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up