The Unholy Trinity Recall

6/6/2020

I hope you found my first blog relevant and it made useful reading.  Taking reference of the trinity analogy, I believe we had yet another unholy trinity event. Rajasthan experienced an intense locust swarm invasion attack, affecting about 90,000 hectares across 20 districts, which disappeared as mysteriously as it appeared.  While the Corona pandemic continues, we had two cyclones, back to back.  The Orissa – West Bengal cyclone was devastating and caused many more deaths and much more damage – the more recent one on the west coast was less severe, and relatively less damaging.  The fact that it finally skirted the city of Mumbai surely helped – given Mumbai’s population density.

Unlock V 1 has been rolled out and whilst the number of cases testing +ve have not reduced, it is still early days to determine if there will be a spike, a steady rise to a peak, or a flattening of the curve.  Several people have expressed different views and an eminent industry captain has opined that we did not flatten the cases curve but flattened the economic growth curve eventually.  There seems to be some early optimism and we must be cautious – a second spike, uncontrolled abuse of the need to be socially distanced and a collapse of self-discipline – is very much a key operative in this world.

Again, in keeping with my theme of trinity, here is the first of them for this blog. We recently conducted a thematic discussion on Moratorium, using a survey, amongst senior stakeholders (Lenders, Banks, HFC’s, Small Banks and NBFC’s).  An initial read of the responses throws up some interesting conclusions:

  1. Diverse views on “Opt In” vs. “Opt out” (for offering the Moratorium).
  2. Diverse views on how to treat March 2020 EMI, if it was paid before or just after the 27th March announcement of the 1st Moratorium.
  3. Most agreed that there should have been more clear standard process, prescribed to minimise confusion in the borrower’s decision-making process.
  4. Finance, IT and Collections are the most impacted functions within the lender’s organisation.
  5. Moratorium 1 does not necessarily mean an automatic Moratorium 2 – there may be some additional, different, process required to be followed on this occasion.
  6. Expect changes in Underwriting Policy and Collection Strategy post Moratorium.

Truly interesting perspectives from these industry leaders and as we finish a few more of these thematic discussion surveys, I will share an analysis in my next blog

Second aspect of the trinity is the Maths behind the Moratorium options.  Interest free Moratorium, charge simple interest for the Moratorium period, charge interest on interest, should one take the Moratorium (Moratorium 2, that is), understand the financial impact post the Moratorium getting over, balancing your current situation and cash flows with a longer term perspective and so on. There are many calculators put up by the lending institutions and also by others and it is always prudent to take a decision regarding availing the Moratorium or not, after evaluating your options.

We will soon be launching a Moratorium Calculator which will encourage borrowers to evaluate their options, understand the maths and then decide. We hope the borrowers will find the calculator useful and simple to use.  With the complexities involved, to unravel them, and then evaluate probably conflicting thoughts and views to finally decide is the next challenge before lenders.  My advice, to all borrowers, at the risk of repeating it:

  1. Do the maths, specially from an independent calculator, and then take an informed decision.
  2. If your cash flows, permit – DO NOT AVAIL THE MORATORIUM – KEEP PAYING.

Now the third aspect of our trinity for today. A case has been filed in the Supreme Court by an individual, seeking relief from paying any interest at all on the impact of availing a moratorium. The hearings are ongoing, as I write this the Supreme Court has asked the Finance Ministry and Reserve Bank of India to file a joint response by next week. This is a classic battle between the banks and other lenders who are charging interest on the EMI’s under Moratorium and in many cases, also charging interest on interest vs the individual who has filed the case.

The three options for the Supreme Court to decide on are:

  1. No interest to be charged on the Moratorium EMI’s – seems unlikely, as it would cause distress to the financials of the lenders?
  2. Charge simple interest on the opening balance from March 1 till the date the customer availed the Moratorium.  Charge simple interest on this amount until it is paid off, and then all goes back to normal – may be the most implementable solution, keeping the interest of all stakeholders in mind?
  3. Allow the lenders to continue “as-is”, what almost all of them are doing – roll up the Moratorium EMI’s, capitalise and recover over the term of loan – interest on capitalised interest – current practice may be looked upon unfavourably by the Supreme Court?

The matter is in the Supreme Court – and if there is a change from what most lenders are doing currently, then there will be an operational chaos (specially on the treatment of whatever the lenders did prior to the Supreme Court’s decision).  Financial stress to the lenders, India’s economic outlook, and a precedent which may not be the best to quote.  Imagine if waiver of interest becomes a norm and then the consequent implications.  We will know soon and the uncertainty shifts from not knowing what to do, to sorting out the consequences of the decision. Fingers crossed. The classic battle between economic considerations and human livelihood consequences.

Moratorium is getting increasingly complex – maybe it is time to have a Moratorium on Moratoriums.

Will be back soon with the third of my blogs – until then be safe, 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.