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Moratorium on loans announced by RBI will be problematic for small financial institutions

Large companies are provided relief by the moratorium granted by the Reserve Bank of India (RBI) with the assistance of its regulatory body the State Bank of India (SBI) to ensure that there is no failure of the economy or banking sector during the lockdown period to contain the novel COVID-19 pandemic. The moratorium seeks to temporarily prohibit the repayment of loans for a period of three months which was a demand raised by borrowers as the lockdown started and all economic activities came to a halt. Many had feared that they would be stranded in a debt trap until the RBI announcement.

“No Moratorium”

While large private sector companies rejoiced, the smaller industries, housing finance
companies, and micro-finance institutions, and non-banking finance companies were thrown into a pit as the State Bank of India circulated internally that these institutions will not be included in the moratorium.

According to the statistics of the Federation of Indian Chambers of Commerce and Industry (FICCI), non-banking finance institutions account for almost 12 percent of the loans taken from banks. The exclusion of these companies could result in huge losses and cash-flow problems incurred by the institutions, if not failure and collapse.

“SBI and RBI Response”

In response to the exclusion of smaller industries, the SBI Chairman Rajnish Kumar had stated that this issue was for the RBI to clarify. This provided no relief to the smaller industries that have already been pushed towards cutting down resources due to severe cash crunches.

Several officials have stated that the smaller industries and non-banking finance companies are included in a long term loan plan as a part of the repo rate policy. This plan seeks to ensure that the borrowers repay the loans in installments over a certain period according to their individual capabilities. Inside sources have stated that of the RBI were to extend the moratorium to these institutions as well, it may result in a reduction in its own liquidity and lending sources as a result.


While the policy may serve to ensure a steady flow of liquidity in the market during the troubled time and such measures had been adopted in the 2008 to 2009 crisis, it had not been utilized.

Several experts including the International Monetary Fund have stated that the world economy is headed towards a recession as the stock markets are heading towards a major decline in shares and companies are undergoing huge losses due to complete economic stagnation. The FICCI reports point towards extreme vulnerability to the non-banking finance sectors which depend greatly on capital market instruments like non-convertible debentures (NCDs) and more recently external commercial borrowings. As the market proceeds towards a crash the flow of liquidity is critical, these avenues of earnings for these industries have dried up. Further, they have received little to no aid from larger companies to help with the financial burden being borne by these institutions. As the different sectors of the economy are preparing themselves for the worst-case scenario in light of an indefinite period of lockdown as the rising numbers do not
indicate any slowdowns as of now.

“Working towards a decision’, state officials”

While rumors of the SBI and the RBI working together to reach a consensus on the matter, several large private sector companies, and large banks have been pushing for the moratorium to be extended to the smaller industries in these desperate times. The burden of repayment of loans during the on-going crisis may prove to be fatal to these companies as many have already suffered an increase in unemployment, wage cuts and loss of production. The demands by India Incorporated for a stimulus package are being considered by the Finance Ministry.

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