It is unfair and imprudent to convert EMI moratoriums into waivers

The Supreme Court had recently sought an explanation from the RBI as to why the EMI moratorium should not be changed into an interest waiver. RBI rightly cited credit quality concerns. Ideally, interest waiver is something that is best avoided at this point.

Moratorium versus waiver

What the banks have offered to the borrowers is an EMI moratorium. Here the EMIs / interest will not be charged for the period up to Aug-20. However, the pending amounts will have to be cleared before March 2021. It is more of a deferral of loan liability by 6 months. People need to opt for this facility only if they need it. In waiver, the bank writes off a part of the loan liability and hence it translates into actual losses for the bank. Moratorium only creates a short term liquidity mismatch for the bank.

Already a ticking time bomb

Many banks and rating agencies have remonstrated that EMI moratorium itself is a ticking time bomb. When the EMI moratorium gets over in Aug-20, then the real extent of the problems may become apparent. With over 30% of banking clients opting for moratorium, there is already the fear that solvency of borrowers may take a big hit after August when the meter starts ticking. A waiver would mean losing 6-months revenues and it is very likely that banks may never recover from the shock.

Moral hazard risk in waivers

While there is an aspect of moral hazard in EMI moratoriums too, the problem could get a lot more compounded in the case of interest waiver. It would induce a lot of borrowers to binge on debt in the fervent hope that eventually the government would intervene and bail  them out of a financial mess. That kind of moral hazard has already pushed PSU banks to the brink with gross NPAs at 9% of the loan book. The moratorium is already expected to spike the gross NPAs to 14%. An interest rate waiver could only worsen gross NPAs in the future. It may also create the wrong impression in the minds of borrowers that it is OK to borrow and default.

Unfair to bank depositors

Uday Kotak, who recently took over as the CII president, has pointed out that such interest waivers maybe unfair to the depositors. Most depositors are already reeling under the onslaught of a sharp cut in deposit rates after banks moved to external benchmarking of loans. A spate of interest waivers may give the borrowers an unfair advantage. There are two arguments to note. Firstly, the interest waiver protects the interests of the borrowers at the cost of the depositors who form the backbone of banks. Secondly, banks need to continue to service deposits so it makes their balance sheets vulnerable and puts their solvency under a cloud!