Moratorium or not: Bankers’ dilemma

Without regulatory intervention, slippages could surge 300 bps

The banking sector is divided on extending the moratorium on loan repayments yet again.

SBI Chairman Rajnish Kumar has dismissed the need for further relaxation on repayments, with initial estimates — pertaining to the impact on banks’ asset quality in FY21 — causing much worry. Krishnan Sitaraman, senior director (financial sector ratings and structured finance ratings) at CRISIL, however, has said that slippages could increase by 250-300 bps in FY21, without any relaxation.

On similar lines, Prakash Agarwal, director and head (financial institutions) at India Ratings, said slippages could rise to even 5.5 per cent, reiterating that banks could be bracing for a tough year in the absence of any regulatory intervention.

HDFC Bank, Federal Bank, and Bandhan Bank have all raised their contingency provisioning towards likely loan losses due to the pandemic, indicating that the amount set aside earlier could be insufficient.

Many of the top banks have either raised or are in the process of raising capital to hedge against a potential spike in bad loans. This indicates that the picture on asset quality is yet to be clear, and explains why banks aren’t too optimistic on the bad loan front from August, after the moratorium gets lifted. So where do Kumar’s concerns regarding an extended moratorium stem from, despite the perils of a pileup in bad loans being clear? It could be due to possible challenges on the asset and liability management (ALM), as well as the implication of the moratorium on credit behaviour of customers.

Moratorium allows banks to book the interest earned during the period for which the relaxation has been granted. However, there isn’t any real cash flow coming into the bank. Given that the interest booked is notional, it could have an impact on ALM of lenders.

“An ALM mismatch is bound to happen, with banks having to pay interest despite no real inflow of cash,” Sitaraman warned.

Banks are yet to feel the pressure of an ALM mismatch. But this is largely because withdrawals haven’t been significant so far, given the magnitude of the lockdown, said Agrawal.

Cash in circulation is expected to rise significantly once economic activity picks up, given that withdrawals by depositors will also rise, compared to March. Sitaraman, though, has reasoned that the repayment capacity of borrowers will also rise along with the gradual revival in the economy, thereby negating the need for a blanket moratorium like the current one.

Fewer customers opting for the moratorium in the second phase has also been cited as a point against extension beyond August. However, Neeraj Vyas, MD and CEO of PNB Housing, said the assumption by some customers that they would be automatically eligible for an extended moratorium — because of which they did not move the bank with a fresh application — has resulted in the falling number.

Nonetheless, there is growing consensus among experts that while the two phases of moratorium have achieved their purpose, the efficacy of a third one is questionable.

“Whether it ends up being a deferment of a 2008-like problem, needs to be seen,” said Agarwal, given how the prolonged relaxation has been a moral hazard and could affect the repayment culture, going by past experience.

What is clear, though, is that banks have a mountain to climb when it comes to balance sheet preservation.