January , 2021
Irregular EMIs: The Pandemic Backwash
00:50 am

Saptarshi Roy Bardhan


Benjamin Franklin had said, “Rather go to bed without dinner than to rise in debt...” For someone who had never defaulted before March 2020 on loan repay instalments, this adage couldn’t be more pertinent, being harried in the pandemic times. Covid-19 has taken a toll on lives and livelihoods of people which in turn jeopardised the financial cycle at both macro and micro levels. The market lost demand, business lost supplies, people lost jobs - which ultimately snowballed into an economic strain on the institutional lenders - namely banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs).


The RBI’s directive to offer six months’ moratorium on periodic loan repayment for the period of March to August 2020 and the Supreme Court’s verdict on September 3 to continue with the order of not marking delinquent loans (beyond August 31) as NPAs have already put pressure on the lenders’ balance sheets. While about 30% of corporate borrowers and 50% of individuals sought moratorium, a ballpark estimate shows that about `26000 crore of delinquent assets has been masked as standard by the Indian institutional lenders.


The damage done by the pandemic on cash flows of borrowers, especially in the retail space, was palpable. Even after the end of the moratorium period, when the monthly repayment obligations have kicked in again, many are stuck with paltry sums in their accounts and eventually default on payment. If auto debit instructions (National Automated Clearing House NACH mandate) numbers is an indicator, then as much as 40% of auto debit instructions (by volume) had bounced mostly due to “insufficient fund” during October vis a vis a 31.5% bounce rate clocked during February 2020. This data does not include the bounce of internal standing instructions given by the borrowers to bank lenders against a loan sourced from them. The figure is expectedly higher in that case.  


The lenders are in a tight spot. While the cost of an EMI bounce, real or notional, is a high and a constant drag on the cash flows, they have to deal with this backwash which is likely to be a block on the road to recovery. Analysts at Goldman Sachs have opined, “We believe elevated zero-day delinquencies would not only keep asset quality under pressure with a high cost of risk in the coming quarters but also limit any sharp revival in retail credit growth....”  


With sizable loan accounts, the recovery became a challenge as the job market got disarrayed and there was a large scale migration from metros to smaller towns. App based lenders, largely popular with the millennials, were the worst hit.


The buzzword in the lender’s back office is now improving the collection efficiency (CE), which is the percentage of collectibles actually realised in cash. Collection of loan instalments had substantially suffered in the immediate aftermath of the stringent lockdown announced in March 2020, and subsequently, due to the extension of moratorium on loan repayments. Thankfully, the median CE had improved over the period from April – June to October-November 2020, after witnessing a sharp drop since the March 2020 level in two of the bigger loan segments viz. commercial vehicle and mortgaged-back loans. November CE for the commercial vehicle loan pool jumped to 93% from a paltry 24% in May, compared with 98-99% in January-March. CE for the mortgage-backed loans were about 96% in October-November versus 99% in March and about 71% in June.


How are things going to play out in the near future? As per RBI estimates, bad debt in the Indian banking system could increase to as much as 14.7% (retail and corporate loans in aggregate) by March 2021 against 8% of the June 2020 level. Importantly, on August 6, the RBI declared a one-time special window for lenders in order to restructure the current loans, which will further allow them to change repayment terms for their borrowers who have been hit by the Covid-19 lockdown. However, real time data shows that there are not many takers for such a relief scheme as the restructuring scheme will effectively reduce the monthly instalment only marginally.

The Author works for Peerless Financial Services Ltd. Views expressed are his personal

 The opinion/s expressed in the article are that of the author's and do not necessarily represent or reflect the policy or position of this magazine.



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