RBI must allow one-time re-structuring of loans to avoid controversy over moratorium on term loans

By N. R. Bhusnurmath

31 August 2020 marks the end date for the moratorium on term loans announced by the Reserve Bank of India (RBI) first in March 2020, in the aftermath of the Covid-19 pandemic and extended for another three months in May 2020. As industry leaders clamour for extension and banks oppose it just as vehemently, the question of further extension of moratorium has become highly contentious.

At the interaction between RBI Governor Shaktikanta Das and members of the Confederation of Indian Industry (CII), on 27 July 2020, HDFC Ltd Chairman Deepak Parekh was emphatic that any further extension would hurt financial sector intermediaries, especially smaller NBFCs. Parekh’s argument was that borrowers who can pay are not paying, taking advantage of the moratorium and deferring payments. His words echoed the sentiments expressed earlier by State Bank of India Chairman, Rajnish Kumar, who had expressed the view that there is no need to extend the moratorium.

On the other hand, Rakesh Mittal, Managing Director, Bharti Enterprises was no less emphatic that failure to extend the moratorium would result in a rise in non-performing assets (NPAs). Mittal’s warning, coming as it does in the backdrop of the RBI’s latest Financial Stability Report that warns of a rise in the NPA ratio from 8.5% in March 2019 to 12.5% by March 2021, in the base-case scenario and 14.7% in a ‘severe stress’ scenario, puts RBI in a tough spot. Should it heed the warnings of Corporate India or bankers?

It doesn’t have much time to take a decision. The deadline for end of the moratorium might still be a month away but the Monetary Policy Committee is scheduled to meet starting from 4^th of August. And decisions such as whether to extend the moratorium or not are, typically, announced by RBI in the section on Development and Regulatory Policies that forms part of the Bank’s Monetary Policy Statement.

So what should the RBI do? For one, it should make it clear, rather reiterate, that the moratorium was never intended to be an across-the-board mandate from the RBI to banks to give a moratorium to borrowers. It was an enabler, a forbearance, from the regulator that put the ball squarely in the court of borrowers. With the proviso that in case they did allow a moratorium, there would be a standstill in asset classification.

The demand from Parekh is, therefore, neither here nor there. Even today there is no compulsion on lenders to grant a moratorium. They are free to grant or deny depending on their assessment of the merits of the case. Borrowers on their part know full well that a moratorium is not a waiver, only a short-term cash management tool in these straitened times.

The plea from borrowers for extension of moratorium, on the other hand, has some merit; albeit in the limited sense that bankers will not be willing to grant a moratorium if RBI withdraws its regulatory forbearance and with that, the proviso for relaxation of the standstill in asset classification.

However, that does not mean RBI should extend the moratorium. The ball now is the RBI’s court. Given that the virus is proving a much more formidable foe in that the pandemic is likely to last for much longer than originally envisaged, RBI needs to take a view which is practical and not try to stick to the letter of Basel regulations. A bit of forbearance at such testing times will go a long way in allowing the businesses to ride out the uncertain and difficult times.

A neat way of side stepping this contentious issue would be to leave it to the banks to take their own decisions; allow a one-time re-structuring of loans. But, without the RBI’s usual caveat: the supervisor would subsequently sit in judgement of their decisions; with the wisdom of hindsight!

Remember, the question of whether loans should be restructured or not is a commercial decision best left to the commercial judgement of banks. Banks must not be penalised for bona fide decisions that subsequently go wrong. At the same time, banks must not re-structure indiscriminately but exercise their commercial judgment after doing a proper due diligence. It is time RBI allows banks to grow up; take their own lending decisions. And then holds them accountable!

• N. R. Bhusnurmath is Adjunct Professor of Finance & Banking at IMT Ghaziabad. The views expressed are the author’s own.