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Key Takeaways from RBI's Financial Stability Report (FSR): An Insight into the RBI Moratorium Scheme and Lending in India

Jul 31, 2020 3:08 AM 3 min read
Editorial

In March 2020, in a major relief to the common citizen amidst the slowing Indian economy, particularity hit by the outbreak of the coronavirus pandemic, the Reserve Bank of India (RBI) allowed borrowers to not pay any equated monthly installments (EMIs) for any loans until May 31st, subject to individual bank policy. 

The Central Bank in May extended this moratorium period by another three months till August 31st. And as per reports, the RBI may extend the moratorium further for some stressed sectors such as aviation, automobiles and hospitality.

 

No Free Lunch

However, in an online discussion organised by CII yesterday, HDFC Chairman Deepak Parekh asked the RBI Governor to not extend the moratorium beyond August. He said extending the moratorium will hurt Non-Banking Finance Companies (NBFCs) as many customers who have the ability to repay are deferring payments.

Within this backdrop, we have a look at the RBI's Financial Stability Report (FSR) published last week, which gives us insight into the moratorium scheme and lending in India. 

 

Key Takeaways from RBI's Financial Stability Report

The FSR highlighted some interesting trends:

 

1. 50% of system loans were under moratorium as of April 30th, 2020. Considering that the outstanding credit in the system was ₹104L cr (including farm loans) as of March 2020, about ₹45L cr or 22% of India’s GDP, is, thus, under the moratorium

2. Moratorium levels are the highest for the MSME sector (65% of loans), followed by individual/retail (55%) and then corporate loan segment (42% of loans.

 

segment-wise moratorium level

 

 

The soaring figures for the MSME sector - also the most affected by demonetisation and GST - come as no surprise. But this is likely to mean that even after the moratorium ends, the Government would have to restructure and capitalise this segment so they can recuperate from the losses incurred during the nationwide lockdown

3. Instances of moratorium sought is the highest for PSBs at 68%. SFBs and NBFCs come in at 63% and 49% respectively. For private banks, the percentage is markedly low at 31%.

 

lender-wise moratorium level

 

This Financial Express report outlines some reasons for this skewed distribution:

First, the Government might have pushed PSBs to be more aggressive in granting moratoriums to customers (afterall they offered the first phase on an “opt-out” basis). Government’s push towards affordable housing had also resulted in PSBs moving more aggressively into the mortgage segment.

Second, given that PSBs account for more stressed assets than the others, it is but natural that the more vulnerable accounts would be in their portfolio relative to other banks. 

4. An analysis by Jefferies of moratorium 2.0 indicates that loans under moratorium are on a decreasing trend across lenders. The collections levels for micro-finance and commercial vehicle segments of loans are also improving.

 

loan % under moratorium

 

5. A stress test conducted by the Central Bank suggests that the pandemic and the subsequent lockdown could push Indian banks’ gross bad loans to their highest in nearly two decades.

The RBI in its FSR report said that in a “very severe stressed scenario” bad loans could rise up to 14.7% of total advances by March 2021 - highest since 1999 - from 8.5% a year earlier.

With yet another extension on the cards, a clearer picture is only likely to emerge by the end of this year. The credit slowdown however is real and there to stay.

credit growth, scheduled commercial banks

FIN.

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