Loan moratorium set to worsen shadow banking crisis

India’s NBFC sector, which has been reeling under stress since the collapse of IL&FS in September 2018, may see the health of many players deteriorate with the loan moratorium, which has been extended by the Reserve Bank of India (RBI) for three more months.

About 65% of the borrowers across the commercial banks and non-banking financial corporations (NBFCs) have opted for moratorium. Industry insiders say that in the case of NBFCs, moratorium granted on loans varies from 20% to 100% of the borrowers.

However, even as the borrowers of NBFCs have been availing its benefits, the moratorium provided to NBFCs from banks is negligible. One of the many such cases has been Indiabulls-HDFC Bank fiasco. Indiabulls, which has been in controversies in the past year, had availed a loan from HDFC Bank worth Rs 540 crore in 2017.

In its petition to the Delhi High Court, Indiabulls said that it had never defaulted on the loan.

Hence, it had filed a writ petition in a bid to restrain HDFC Bank from recovering any loan amount during the moratorium period imposed by RBI. However, by that time, the bank had already deducted Rs 90 crore from its fixed deposit placed as security for this loan.

“In our view, this is a mixed bag for NBFCs – while it provides relief to borrowers, it also further stretches the ALM mismatch for many NBFCs,” Asia’s largest brokerage house Motilal Oswal said in a note.

This has brought back the focus to ALM mismatch, or asset-liability mismatch. What is this mismatch, that was the talk of Indian markets a year ago?

NBFCs raise short-term funds and lend them out as long-term loans, thereby causing an asset-liability mismatch. For example, an NBFC borrows a sum of Rs 1 lakh through a debt paper that is to be repaid in six months’ time. In turn, the company lends this amount, say, in the form of a car loan repayable over five years. When this happens on a large scale, with thousands of crores involved, it results in a liquidity crunch and a repayment crisis for the NBFCs.

However, post the IL&FS crisis, all NBFCs shored up liquidity on their balance sheet – average liquidity has increased from 4-5% of loans to 8-10% currently. Hence, most NBFCs, despite facing the heat of the situation are likely to meet their payments. Also, the government guarantee on debt worth Rs 30,000 crore to investment grade NBFCs, is likely to ease the liquidity position, as well.

Simply put, between an affordable housing finance company (HFCs) and a vehicle financier, the chances of an ALM mismatch at the HFC are higher, in an ideal scenario.

But NBFCs aren’t only worried lot right now. Banks fear a huge surge in non-performing assets in the second part of the year.

Industry insiders say that with the RBI anticipating contraction in GDP, many businesses will face the crunch to repay their loans. “Right now, it is not showing up as there is lid over these NPAs because of the moratorium,” a senior public sector banker told DH.

Borrowers opting for a moratorium on principal and interest payments include all micro-credit customers, 35% of SME customers, and 59% of NBFC-MFIs.

Moreover, the banks fear that continuous moratoriums will spoil the credit culture in the country.

There are fears that industry-wide gross NPAs, by the end of this year, will surge by about five percentage points to about 16%.

Also, with the moratorium, the profitability of the banks is likely to be severely hit, in the first two quarters of the current financial year. Interest earned over these loans is one of the primary sources of income for the banks.