Why Moratorium wasn’t extended…

RBI had announced Moratorium a 3-month moratorium which was extended for another 3 months. We have seen what the Moratorium was and why was it announced here.

But RBI has decided not to extend Moratorium beyond August. Let us see why?

ALM (Asset Liability Management) Issues:

Banking is a business where Banks borrow for a shorter duration and lend for a relatively longer duration. Most of the deposits with Banks are of relatively shorter duration than the duration of the loans it gives out.

The underlying idea is that not all depositors will come at the same time to withdraw their money. All the deposits and borrowings of the Bank are its Liability while the loans it gives are its assets.

Now, Moratorium meant that borrowers of the Bank can postpone their Principal and interest payments. Thus the Bank loses out on its cash inflow for that period. The duration of these loans increase as payments are postponed. 

But the Banks still need to pay interest etc to its depositors as well as lenders.

The issue was more acute for NBFCs which can’t raise demand deposits (Current and Savings accounts which are payable on demand) and need to borrow from Banks and other sources. NBFCs weren’t getting a Moratorium on these payments that they needed to pay.

NBFCs had a higher share of loans under Moratorium. Smaller NBFCs which are not in a position to raise capital would have been hit hard, if the moratorium was extended. Thus, extending Moratorium would have had an impact on the financial stability of the Banking Industry.

Impact on credit culture:

There was a fear among experts including former RBI Governor Raghuram Rajan that extended Moratorium may impact the credit behaviour of many borrowers and they might be less inclined to pay their loans.

Also, there was fear that cash which would have ideally gone for debt servicing would be diverted to other uses and may later result in defaults when moratorium is lifted. Extended Moratorium would have increased this risk.

Therefore RBI has decided to go for one-time restructuring than a blanket Moratorium after August 31st. 

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