The Reserve Bank of India (RBI) keeping in the mind the intensification of COVID-19 disruptions has imparted priority to relaxing repayment pressures and improving access to working capital by mitigating the burden of debt servicing, prevent the transmission of financial stress to the real economy, and ensure the continuity of viable businesses and households announced an extension of the moratorium on term loan EMIs by another three months, i.e. till August 31, 2020 in a press conference dated May 22, 2020. The earlier three-month moratorium on the loan EMIs was ending on May 31, 2020.
Given that most industries are still reeling under stress and Unlock phase is also being adopted, let us see the pros and cons both of extending moratorium further by RBI.
In the wake of the COVID-19 disruptions, the moratorium was necessary and enabled borrowers to face somewhere interest and loan burden during lockdown period, but now since lockdown is lifted and we are in phase of Unlock-3 also as announced yesterday 29.07.2020 by MHA, most of the activities are open, there seems no blanket requirement of providing moratorium further to all. Govt has also provided relief measures to MSME by way of providing credit line of 20% of their credit portfolio in the name of GECL. So selective approach could be exercised by RBI targeting specific sectors affecting adversely due to Covid-19.
Detailed workings are as below:
1. Rescheduling of Payments - Term Loans and Working Capital Facilities
Extend the moratorium by another three months i.e. from June 1, 2020 to August 31, 2020 on payment of all installments in respect of term loans (including agricultural term loans, retail and crop loans). Accordingly, the repayment schedule for such loans as also the residual tenor, has been shifted across the board. Interest continues to accrue on the outstanding portion of the term loans during the moratorium period.
Here borrower need to pay the total accrued interest at one go during month of Sep 2020. This may cause hardship to borrower. Here RBI may give option to convert this interest into FITL and give option to borrower to pay in installment like CC as below.
Allowed a deferment of another three months, from June 1, 2020 to August 31, 2020, on recovery of interest applied in respect of all such facilities. to convert the accumulated interest for the deferment period up to August 31, 2020, into a funded interest term loan (FITL) which shall be repayable not later than March 31, 2021.
Bank shall formulate policy in August month to convert the accumulated interest on CC and convert it into FITL that shall be payable into maximum 7 months starting from Sep 2020.
Project Funding to Infra including Real estate:
As COVID has stopped or at least slowed down the progress of many infra including housing & real estate sector. GOI has also under stood the reason and invoked Force Majure clause and accordingly provided additional time of 6 months to 12 months to implement the project so RBI should also come out immediately one-time extension DCCO as well as repayment period for such project as they are facing huge cash flow mismatch. This may dent the Balance sheet of the Bank.
Changes in Assessment methodology for Working Capital Limits:
Borrowers facing stress on account of the economic fallout of the pandemic and liquidity crisis as well as there is changes in operating cycle of the business of the many industry, banks/RBI need to reassess the methodology for assessing the working Capital limits rather sticking on old traditional methods like turnover or nayak committee and others. Cash flow based funding also need to be checked during current time for at least 2 year till normally arrives.
Financial performance of the many Company has suffered and it may reflect in their ABS for FY 2019-20 as well as FY 2020-21. Credit Risk rating and other parameters will also be affected due to this and may have an adverse impact on credit profile pricing. Bank/RBI should account for this and should not consider this period as a benchmark for assessing performance and taking credit decisions.
2. Asset Classification
Asset Classification norms also need to be revisited. Loans coming into above relaxations may be given standstill classification and others might attract SMA norms accordingly.
Here views expressed are personal in nature and based upon personal information and judgment.