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Borrowers welcome RBI’s loan moratorium move, lenders fret

The RBI in its announcement added that in order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the deferment period on working capital facilities in one shot, lending institutions are permitted to convert the accumulated interest on working capital facilities over the deferment period into a funded interest term loan.

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Last Updated: May 22, 2020, 04.00 PM IST
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The only solution, according to Mittal is to ensure that the moratoriums are extended all the way down.
SMEs welcomed the Reserve Bank of India’s (RBI’s) announcement to extend the moratorium on payment of installments in respect of all term loans till August 31st, but many are not sure if it will make any material difference to the problems businesses currently face.

Mahavir Pratap Sharma, the Immediate Past Chairman, CEPC says while the measures are good for liquidity, or the supply side stimulus, the economy needs a demand side stimulus also. “The business cycle, which is sales, needs to start. The Return on Investment basically has three buckets - loan repayment, operating costs and income. The sales cycle has to start and only then will we be able to work on paying interest, loans and running the business,” says Sharma.

Anil Bhardwaj. Secretary General, Federation of Indian MSMEs (FISME) says considering the huge liquidity pressure on the MSME sector, it was expected a 6-month extension on top of the 3 months' relaxation earlier given. “The liquidity problem is not going to go away anytime soon. However, so far so good and the move is welcomed,” says Bhardwaj.

Lenders in a fix
The move will be good for the borrowers;, but the lenders are a worried lot. Alok Mittal, Cofounder and CEO of Indifi Technologies, says the move will certainly raise fears of an asset-liability mismatch among NBFCs. “The transmission of even the latest measures that the government has taken to benefit NBFCs has been relatively limited. So, I do expect the new development will cause liquidity issues, especially in the case of NBFCs, if not with the banks,” says Mittal.

According to Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co, while borrowers heave a sigh of relief, the banks and financial institutions will continue to worry. “Their access to committed cash flow continues to remain in suspension and in the already stretched system; banks will find it a challenge to meet the growing needs of financing, the demand for which will continue to be on an increase,” says Sivaramakrishnan.

With IBC suspension being on the anvil, Sivaramakrishnan says while provisioning and asset classification benefits will extend, banks in India will continue to face a challenge with their assets, especially with the moratorium being further extended. “The principle is that any relief to borrower must commensurate with benefits to the bank. In light of this principle, a 6 month moratorium and the expected suspension of IBC, is likely to hurt the banking and finance sector further,” Sivaramakrishnan says.

The only solution, according to Mittal is to ensure that the moratoriums are extended all the way down. “So, banks have to be instructed to pass on the moratorium to NBFCs. Currently, the asset-liability mismatch (ALM) is coming up because banks are not passing the moratorium to NBFCs, which in turn, are being expected to pass on the moratorium benefits to borrowers and this is causing a mismatch here,” says Mittal.

Ashish Sharma, CFO - Aye Finance also shares similar views when he says that to ensure the NBFCs continue functioning smoothly as well, the authorities need to focus on three things -moratorium benefits are also extended to NBFC by the Banks, Banks to start lending to NBFCs that focus on MSMEs, and Credit Rating Agencies should take a more lenient view given the market situation.

Staggered interest repayment
The RBI in its announcement added that in order to ameliorate the difficulties faced by borrowers in repaying the accumulated interest for the deferment period on working capital facilities in one shot, lending institutions are permitted to convert the accumulated interest on working capital facilities over the deferment period (up to August 31, 2020) into a funded interest term loan, which will be repayable y March 31, 2021.

Mahavir Pratap Sharm says the fact that interest is staggered doesn't make much sense. “The amount is not waived off. It is ok in the short run. Yes priority becomes operations and not repayment, which will help people survive longer. However, without commencement of business cycle and consumers' change of money and profits coming in, such measures won't help,” he says.

The staggered interest loan aspect, Ajay Sahai, DG & CEO, FIEO, says will have two issues at play. “If the cost is reasonable, it will surely be of help. However, even if it is at the market rate, it will give breathing time. The interest rate will be a crucial aspect. If banks are encouraged to lend more, we will see more competitive interest rates coming forth,” says Sahai.

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