Granting a moratorium on long-term loans is a measure the Reserve Bank of India has implemented to “ease financial stress caused by COVID-19 disruption by easing payment pressures” on households and businesses. All major lenders are allowed to defer collection of contributions, voluntarily extending the term of the loan. Along with the provision to provide unprecedented liquidity to lenders, the moratorium provision is expected to help households, businesses and the financial system manage their cash flow.

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The moratorium is only a cash flow management tool

We have to recognize that, if accepted by the lender, the moratorium provision gives the borrower time to reallocate their cash. It doesn’t help increase cash flow in most cases. This can help increase cash flow only for borrowers who are able to repay and choose not to, because they can invest their cash in a business that gives them a return that exceeds the cost of the debt. In other words, it is of limited value to borrowers whose cash flow has declined due to lower income.

Lenders should benefit if borrowers’ creditworthiness does not decline

In a declining interest rate scenario, lenders certainly benefit from a delay in collecting contributions, as they may borrow at a lower rate than they have lent to borrowers who choose to delay their payment in the future. the framework of the moratorium policy. However, the deterioration in the creditworthiness of these borrowers can impact lenders’ margins, especially if they find themselves with credit losses once the moratorium is lifted.

The value of the moratorium depends on the pace of economic recovery

As the moratorium is only a cash flow management tool, it loses its effectiveness if borrowers’ income or cash flow does not improve soon enough. If the economic recovery is not V-shaped or if there is a structural slide in growth to a lower level, one can expect a sharp increase in NPAs once the moratorium period ends.

India’s economic performance and growth in household disposable income

At this point, we have experienced an unprecedented collapse in profits, which was preceded by a prolonged slowdown since the fourth quarter of fiscal year 2017-18.

Not only the recent slowdown and collapse in GDP growth rates, the country has seen a decline in the growth of household disposable income (Data source: National Accounts Statistics and RBI’s database on Indian economy) since 2010, which also coincided with a decline in the growth rate of household savings (except in recent years).

System-wide decline in credit quality and its impact on economic recovery and the cost of credit

A prolonged period of slow growth could also lead to a system-wide downgrade in corporate and household credit ratings, as banks and credit bureaus begin to assess the impact of uncertainty. economic impact on profits and cash flow, especially those that have opted for a moratorium. A system-wide decline in credit quality would imply a higher cost of credit and less willingness to lend, thus reducing the likelihood of a sharper recovery. It is therefore important that all players in the financial sector value chain (lenders, credit bureaus, credit insurers, etc.) and the RBI consider the issue of credit quality from a long-term perspective and adopt a unified approach for credit assessment and NPA classification.

In summary, if the loan moratorium was an appropriate choice in the short term, its value in the medium term will depend on the shape and pace of the economic recovery, especially for businesses and households with incomes and cash flows. have fallen sharply – and in a context where the GDP growth rate has been declining for almost 2 years and the growth in disposable income of households has experienced an almost secular decline.