Some lenders, particularly private sector institutions, fear that if a large number of borrowers refuse to service loans, Reserve Bank of India’s measures to soften the blow from Covid-19 could fall short of requirement. In such a situation the moratorium on interest and loan repayment will more than offset the benefits of extra liquidity.
Faced with such a situation, these banks would be reluctant to extend the moratorium to certain categories of borrowers such as government employees whose salaries have not been impacted or large companies with the wherewithal to tide over the crisis.
Last week, the monetary authority lowered cash reserve ratio (CRR) — the slice of customer deposits banks set aside as cash with the regulator — by one percentage point, and raised the accommodation under marginal standing facility (MSF), under which banks borrow from RBI against government securities.
Concerns for Banks with High Credit-Deposit Ratio
“If 50% or more borrowers opt for moratorium, then the additional liquidity made available through the RBI measures could be less than the amount that banks would not receive as interest payments and principal repayments from borrowers during the three-month moratorium. Since these banks will have to continue to pay depositors the interest and maturity amounts, such a situation could actually worsen the liquidity position of banks,” a senior banker told ET.
According to industry sources, banks have discussed the matter among themselves over the past few days. “This is an issue which concerns banks with high credit-deposit (CD) ratio… Under such circumstances, the central bank will have to consider opening a general line of credit to banks,” said another banker.
Consider a bank with a net demand and liabilities (or net deposits) of Rs 10 lakh crore and loan book of Rs 6 lakh crore. The CRR cut and MSF flexibility will release Rs 20,000 crore liquidity for the bank. Suppose the moratorium becomes effective on 50% of the loans having an average yield of 12% and average tenor of 5 years. A three per cent delay in interest (for the three months) would mean deferred interest inflow of Rs 10,500 crore. Along with the postponement in payment of loan principal, the bank’s receipt of interest and principal on loans would be well over Rs 20,000 crore. This could cause a liquidity crunch for the bank and impact its ability to lend.
After June, the bank may either raise the loan EMI or extend the tenor of the loan. This would depend on whether the borrower has the capacity to afford higher EMIs or is in a position to repay the loan over a longer tenor. According to an industry person, in case of stress loans which are yet to be categorised as non-performing assets, banks will consult RBI on the treatment of these `special mention assets’ and whether to stop applying interest on such loans or recovering instalments (known as freezing the clock in banking parlance).
