Has India’s Moratorium on Loan Repayments Delayed Banks’ Suffering?
SONE AFTER India entered a strict lockdown in March as its central bank allowed borrowers to defer loan repayments for three months. This moratorium has since been extended for a further three months, and another extension is reportedly being considered. It seems to have been a boon for borrowers. But big financiers, like Deepak Parekh, the president of HDFC, a major mortgage lender, and Uday Kotak, the managing director of Kotak Mahindra Bank, are starting to fear that this will harm the financial system. They urge the Reserve Bank of India (RBI), the central bank, to change course.
The moratorium was aimed at preventing the liquidity shortage induced by the lockdowns translating into a more lasting shock, by giving income-strapped companies time to repay their debts. India has not been alone in using payment holidays, although those in other countries have tended to be more limited in length and scope. But the Indian government is less able than those in the rich world to afford other means of supporting borrowers, such as generous cash distributions.
A large number of borrowers have taken advantage of the payment holiday. In its Financial Stability Report, released on July 24, the RBI noted that half of all loans went unpaid in April. Two-thirds of loans made by publicly-controlled banks, which hold 70% of industry assets, have not been repaid. A smaller but significant share of loans was not repaid in private banks, rising from one third of total loans from domestic lenders to one tenth from foreign lenders.
One of the reasons for the disparity between private and public lenders is that different banks attract different types of borrowers. Small and medium-sized enterprises, which depend on public lenders, were avid users of the moratorium. These are unlikely to have huge cash buffers; As incomes dried up, they may have had little recourse but to defer loan repayments. In contrast, foreign banks primarily serve multinational companies with deeper pockets. Some banks have asked borrowers to join the program. Others initially used a more generous “opt-out” approach, although they have since changed course.
Second-quarter bank earnings reports, released in the past two weeks, suggest that the adoption of the programs may well have reflected the demands of the foreclosure. Axis Bank and HERE, major private lenders, reported that loans held under moratorium fell from 30% in April to less than 20% in June; Kotak Mahindra reported a drop from 26% to 10%. Public banks are only beginning to release their profits, but their use of the moratorium also appears to have declined.
Analysts are now asking if loans and interest obligations will be fully repaid once the moratorium ends. the RBI predicts that non-performing assets, as a share of the total, could drop from 8.5% in March to 12.5% in 2021. He estimates that this could exceed 16% for public banks in a “severely stressed” scenario. which push the capital ratios of some banks below regulatory requirements. Shaktikanta Das, the RBIThe governor of, urged banks to “proactively increase” their capital now, rather than waiting for deficits to be revealed later. On July 27, Fitch, a rating agency, was more adamant, warning that “state banks face solvency risk without further injections of capital.”
The amount of capital required is unclear, given the uncertainty surrounding loan losses. In April, Prakhar Sharma, an analyst at Jefferies, an investment bank, estimated new capital requirements for public banks at 889 billion rupees ($ 12 billion) and half that of private lenders. Some banks are starting to prepare: Kotak Mahindra raised nearly $ 1 billion in May; HERE plans to seek a similar amount, as does the State Bank of India, the country’s largest lender. But many of India’s weaker banks, struggling with legacy problems and uncertain loan losses, are likely to attract little interest from investors. Much of the RBIThe pandemic’s first response to the pandemic involved protecting borrowers. He may still be forced to intervene to save some lenders. ■
Editor’s Note: Some of our covid-19 coverage is free for readers of The economist today, our daily bulletin. For more stories and our pandemic tracker, check out our hub
This article appeared in the Finance & Economics section of the print edition under the title “Delayed Reaction”