The COVID-19 pandemic that never really left us has started increasingly affecting our lives, livelihoods and situations all over again. With the active cases increasing thirteen times as much in the last months itself, states have started becoming more and more cautious of this second wave of virus in the country, with stricter restrictions like night curfews, stricter fines and displacement of local markets among other precautionary measures being adopted by most states. While this absolutely plays a vital role in curbing the spread of the virus, especially since India adopted lockdown as its only containment strategy, the economy and more specifically small business owners are in no position to afford another lockdown keeping in view the state of the market, the fiscal condition of the country and the precautionary saving attitude’s impact on aggregate demand.
With the unemployment rate further expected to increase as a result of this fast spread of the virus and the corresponding deterioration of economic health of the country, we cannot really say if the Central Bank would be able to announce another loan moratorium as a relief measure. Let’s go a little into the past before discussing its future. A moratorium period is a time during a loan term when the borrower is not required to make any repayment. Normally, the repayment begins after the loan is disbursed and the payments have to be made every month. However, due to the moratorium period, the payment starts after some time. This loan moratorium was adopted as a relief measure back during Corona 1.0 when the lockdown was announced in an attempt to aid the already pressured businesses. So, the question here is- If, however, the situation gets worse and the lockdown is announced, can the RBI announce another loan moratorium? Or better yet, can the RBI afford another loan moratorium?
While the loan moratorium acted as a relief to the small, medium and big businesses as well as self-employed and salaried individuals that were struggling to repay home or other loans in the face of halted supply and decadal low demand, the banks of the country, however, did not really see this as a piece of good news for them. And who can blame them, especially considering that India’s twin balance sheet problem that started off with banks and infrastructural agencies hasn’t had its redressal as yet and well, the banks are in a poorer state now more than ever. “Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5% in March 2020 to 12.5% by March 2021 under the baseline scenario; the ratio may escalate to 14.7% under a very severely stressed scenario,” said the RBI report back in July 2020. This, in addition to other things mentioned, is highly suspected to bring about a sharp rise in the banks’ gross non-performing assets. A report by ICRA expects banks’ gross NPAs (excluding write-offs) to rise 9.6-9.7 per cent by April 30, 2021. The rating agency further predicts GNPAs to rise over 10 per cent by March 31, 2022. Not only that, but the banks are also to declare all defaults and bad debts as non-performing assets, as per standard procedure, that have been on a spree for quite some years now, both a cause and result of India’s four balance sheet problem. A large proportion of bad loans are likely to be recognised in FY22 due to multiple regulatory forbearances, including the 180-day moratorium on the recognition of impaired loans. Hence, to strengthen their balance sheets and capital positions, many Indian banks have announced capital raising plans.
All this data and expectations point at one particular implication- the banks are in no position to afford the burden of new relief measures because the financial health of banking institutions have been severely deteriorated before and over the pandemic. As a result, the announcement of a loan moratorium from the central bank is a highly unlikely expectation. Even though the loan moratorium served as the biggest relief last year during the pandemic, its probability this year cannot be thus counted on, and honestly, it is expected that businesses would not feel the need for a loan moratorium too at the moment. It is because they’re expected to be more prepared for facing the situation now than they were in the previous year. “In today’s conditions, there is no need for a moratorium,” said Shaktikanta Das, the governor of Reserve Bank of India, during an interaction with journalists after the announcement of the new fiscal year’s first monetary policy review. Shaktikanta Das went on to say that businesses, particularly private ones, are better positioned to tackle the Covid-19 situation and to continue activities. Shaktikanta Das also made it clear that the future course of action could change depending on the situation.
However, even though the loan moratorium is off the table, for now, there are a lot of other relief measures the central bank and thus, all commercial banks, are willing to give the people to act as relief measures during the time of need and aggravate the recessing economy. These could be in the form of increased money supply, reduced repo rates or structured bond buying. “We regularly monitor asset quality data. In any situation, a central bank should not give a knee-jerk reaction. And we will not take it either. We will watch a situation, its depth, gravity and impact before making a decision,” Shaktikanta Das said.