RBI Monetary Policy: Will moratorium get another extension?

Besides its decision on interest rates, the Monetary Policy Committee headed by RBI Governor Shaktikanta Das is also likely to take a call on one-time loan restructuring as demanded by the industry and the extension of the much-discussed loan moratorium scheme.

Hyderabad: The three-day meet of the Monetary Policy Committee (MPC), headed by Reserve Bank of India (RBI) Governor Shaktikanta Das, that begins today will be a keenly watched event as it is not just expected to decide on policy rates, but also on how it plans to deal with the growing risk of bad loans in the economy.

In the forthcoming bi-monthly monetary policy review, the MPC is likely to take a call on one-time loan restructuring as demanded by the industry and the extension of the much-discussed loan moratorium scheme announced as an economic relief measure after the Covid-19 outbreak.

Loan moratorium scheme

With the loan moratorium scheme due to end on 31 August, debate is now on whether RBI should extend it for a second time after the first extension in May for three months.

Initially, the loan moratorium scheme was approved by the RBI for a period of three months starting from 1 March 2020 in view of the adverse impact on incomes due to nationwide lockdown.

Moratorium period basically refers to the time period during which the borrower is not required to pay an EMI (equated monthly installment) on the loan taken.

Banks and credit rating analysts believe that any further extension of the moratorium on loan repayment will raise the risk of triggering a surge in non-performing assets (NPAs) in the financial system.

State Bank of India (SBI) chairman Rajnish Kumar on Friday said: “Most bankers, including myself believe that there is no need for a moratorium beyond August 31… we are confident that six months is long enough for allowing non-repayment.”

HDFC chairman Deepak Parekh is also apprehensive of any further extension. “Please do not extend the moratorium. We see that even people who have ability to pay whether corporate or individuals are taking advantage under this and deferring payment… It’s going to hurt and hurt smaller NBFCs,” Parekh said.

However, Union finance minister Nirmala Sitharaman on Friday indicated that her ministry has been working with RBI on extending the loan moratorium period, at least for the hospitality sector.

“I understand the requirements of the hospitality sector on extending the moratorium or (loan) restructuring. We are working with the RBI on this,” she told members of the Federation of Indian Chambers of Commerce and Industry (Ficci).

One-time loan restructuring scheme

As Sitharaman hinted, a one-time loan restructuring scheme is also on the cards. Experts believe that given the current economic trends, an extension of loan moratorium will only defer the problem instead of solving it. So, a one-time loan restructuring is being seen as a more practical alternative.

Loan restructuring essentially means reworking the conditions of the loan in a way that matches with the borrower's ability to repay. It may involve amending the loan repayment schedules and/or extending loan tenures or restructuring the EMIs, without affecting the asset classification.

However, RBI is cautious about one-time restructuring because of its past experience with such schemes. During the 2008 crisis, RBI had offered a similar plan, but it led to a sharp spike in NPAs in the banking system.

A CLSA report had earlier said that 70% of the loans restructured from FY08 to FY18 turned NPAs, with only 25-30% recovered to standard loans.

“We believe a 1-2 year repayment period extensions rather than deep restructuring (as in the last cycle) would help balance the interests of borrowers and shareholders,” the CLSA report had said.

A further cut in interest rates?

In order to limit the damage to the economy, the MPC has already cut the repo rate by 115 basis points in two “off-cycle meetings”.

Experts, however, are now divided on the possibility of another rate cut after the recent surge in retail inflation.

Notably, higher prices of food items pushed the Consumer Price Index in June to 6.09% – above the RBI’s inflation target of 4% (and an upper tolerance level of 6%).

Former RBI deputy governor Viral Acharya on Saturday said inflation is higher than expected and the rate-setting panel should “respect” its core mandate of controlling price rise at the next week’s policy review meet.

All eyes on the RBI’s key announcements on Thursday.

(ETV Bharat Report)