Moratorium – ” a solution or a problem”

If ever there was a googly or a curve ball – its COVID – 19. Call it whatever you want – even call it World War III – against an unseen enemy, across the world, no end in immediate sight and a truly global war across religion, cast, creed, gender and country. Everyone is talking about the new “normal” – and the problem is no one knows what the new normal will be. Or when will all this end…leave alone how!

Economic disaster, financial sector hugely impacted and real estate in big trouble. Doomsday advocates and experts have predicted gloomy and dark days ahead. Coupled with the consequent social issues which are a direct fall out of the economic crisis, things don’t look very encouraging – at least in the foreseeable future.

The sun must rise after every darkness and this too shall pass.

Around the end of March 2020, the Reserve Bank of India announced a moratorium of 3 months for paying your loan instalments – and within moments,  the media took over – and before you could spell moratorium some sections of the media had branded it as a waiver. Then there were several experts who opined on what could or should be done and also started advising the common man on the best course of action.

Confusion spread faster than the virus itself with every lender (banks, NBFC’s, HFC’s) all rushing to interpret the RBI announcement. In the meantime the March EMI’s were being paid or collected thru an efficient system of direct debit. So in many cases, automatically the 3 month moratorium was reduced to a 2 month moratorium.

I had said then to a private group of colleagues that this was an operational disaster which would, like the virus threaten to peak in June and the September quarter

Here are some illustrative reasons why I believe that:

  1. Every lender has chosen to interpret the RBI guidelines to its convenience.
  2. Consumers are getting confusing operating instructions
  3. Some lenders are offering Opt in and some are asking for an Opt out
  4. Some lenders are refunding the march EMI, some are taking it in
  5. NBFC’s and HFC’s are getting hit on one side of their balance sheet – customers opting for moratorium,  but they not getting moratorium on their repayments to their lenders (at the time of writing this)
  6. No standard policy and process prescribed or suggested to implement this moratorium
  7. Consumers not understanding that if they have the cash flows and income keeps flowing in – they should pay their EMI and NOT opt for a moratorium.
  8. IT systems of several lenders not geared up to manage this one time change and incorporate into their LMS

I think the one single piece of advice I would give to consumers is

“IF YOU HAVE THE CASH FLOWS – PAY YOUR INSTALMENTS AND DO NOT TAKE THE MORATORIUM”

Having said that, we are now into early May so that advice may be purely theoretical – the deed is probably already done.

There are now discussions in various forums about extending the moratorium by another 3 months. Whilst there may be a case for that from the lockdown and related and consequent perspective here are some suggestions, in case another 3 months moratorium is announced

  1. Issue standard operating procedures for opt in vs opt out, for adjustment of EMIs received, for treatment of the moratorium EMI’s , treatment of classification and / or one time restructuring and a host of other areas basis the lessons from the first moratorium
  2. IBA and lenders to educate the borrower on the benefits or otherwise of opting for a moratorium
  3. Clarity on if there is an automatic extension or does the customer has to go thru the process again.
  4. Clarity on delayed payment interest for customers who opt for moratorium.
  5. Ensure each lender has systems that can handle the operating process adopted.
  6. Processes followed are customer friendly.
  7. NBFCs and HFC’s are given the same relief that they are required to offer their borrowers – or else we will see several of them just severely stressed.
  8. If a consumer opts for M1 can he opt out of M2 and visa versa

I am sure there will be several micro issues …hopefully the lessons of moratorium1 are well learnt to make moratorium 2 an easy experience for the already troubled individual.

Locked down, social distancing, COVID -19, isolation, virus, corona, ventilator, testing, infection …. When can we hear good news. Sooner than later although there is a lot of uncertainty.

Stay safe, stay at home, take care and stay well.

About Author

Satish Mehta

Satish Mehta is a mortgage finance and credit information veteran with global and domestic experience of over 40 years. He runs a boutique consulting firm - Athena Advisors. He is a consultant to the World Bank Group and a Professor of Practice at the Ahmedabad University.