Financing activity was dominated for a substantial component by refinancing and stressed lending in 2020. Shilpa Mankar Ahluwalia, Partner, Shardul Amarchand Mangaldas and Co. says “The RBI moratorium scheme provided much-needed relief to borrowers affected by COVID-19, but was a temporary short-term solution.”
In an exclusive interview with Priyadarshini Maji, she says the regulators will almost certainly require to consider of added approaches to handle pressure in the monetary sector although also guaranteeing liquidity as the financial influence of COVID-19 continues into 2021.
- Reviewing 2020: What have been some of the big developments?
Financing activity was dominated for a substantial component by refinancing and stressed lending. The RBI moratorium scheme supplied a lot-necessary relief to borrowers impacted by COVID-19 but was primarily a short-term quick-term resolution. The regulators will almost certainly require to consider of added approaches to handle pressure in the monetary sector although also guaranteeing liquidity as the financial influence of COVID-19 continues into 2021.
- Loan Moratorium, Financial Stimulus – Its intended impact and measures by the RBI
The RBI had issued a moratorium scheme on March 27 permitting banks and lending institutions to grant a moratorium on payment of interest, principal and EMI payments falling throughout the period March 1 to May 31, 2020. This period was subsequently extended till August 31, 2020. The RBI also subsequently (in August 2020) introduced a 1-time restructuring scheme permitting banks and lending institutions to restructure particular categories of loan accounts facing COVID-19 associated pressure, which was a a lot-necessary initiative.
The intent of the RBI moratorium scheme was vital to provide relief to borrowers provided disruptions to earnings and organizations triggered by COVID-19 without having lenders obtaining to classify these accounts as “bad” or borrowers obtaining to face a downgrade in their credit rating.
The intent was in no way to need lending institutions to either implement “interest waivers” vis-à-vis borrowers (or particular groups of borrowers) or to absorb the price of the moratorium, which signifies that lenders passed on the price of deferring repayments (i.e. interest on interest) to the borrower. The RBI also produced it clear that banks have the potential to frame their personal board authorized moratorium schemes and have the flexibility to determine which groups of borrowers have the correct to avail of the scheme and what the terms will be.
There was a mismatch in between borrower expectation and the moratorium schemes provided by various lenders. While it is significant to provide relief to borrowers, it is also significant to recognize the pressure facing the banking sector, and a framework that allocates the monetary price of COVID-19 totally to the lending institutions or artificially delays classification of stressed accounts as NPAs may possibly not be viable in the lengthy-run.
- Banking and finance sector post-COVID-19
The banking and finance sector saw its personal share of pressure post-COVID-19. The non-banking monetary institutions, in distinct, faced a liquidity crunch, triggered also partly by the RBI moratorium scheme that did not extend the advantage of the moratorium to NBFCs (as a borrower group), although quite a few of them did roll out schemes for their personal set of borrowers.
Given that the adverse financial influence of COVID-19 is most likely to continue, the banking sector will require to re-appear at how to handle stressed assets. While the RBI moratorium framework was efficient in giving quick term relief to borrowers, in some strategies it merely postponed the issue to a future date with added expenses.
One important aspect of generating an atmosphere exactly where lending institutions extend liquidity to borrowers who may possibly be slightly stressed is to guarantee that lenders have the potential to enforce safety upon default. Post COVID-19, courts have, on various occasions taken “borrower-friendly” positions and restrained lenders from enforcing safety. Such a trend can considerably alter the credit danger of stressed lending and will be significant to alter, provided that as a outcome of COVID-19, there is an growing quantity of stressed borrower groups in require of financing.
- Outlook and roadmap for 2021
2021 may possibly, hopefully, witness some return to “normalcy” following the outbreak of COVID-19 in 2020. To guarantee that the banking and monetary sector is capable to meet the liquidity needs of a stressed economy although nevertheless becoming capable to handle its personal pressure will be crucial.
Tapping into foreign investment by way of the bond industry is undoubtedly 1 way of growing liquidity, and relaxing some of the restrictions about foreign portfolio investment into INR debentures could be 1 resolution to bring in added debt capital into the monetary technique.
It is significant for banks and lending institutions to have the flexibility to channel their capital, handle their personal schemes and allocate expenses linked to moratorium applications and other relief measures. It is equally significant for the RBI to manage the framework that demands banks and lending institutions to determine and provide for stressed loans. Judicial or other interference in this course of action could have significant repercussions.
- Currently, India is the world’s third-biggest fintech industry with innovations in digital payments. Can it surpass the USA and UK in upcoming years?
Digital payment options in India have witnessed tremendous development. This is simply because of two important aspects:
(i) the availability of a 1st-class inter-operable digital infrastructure (managed and operated by NPCI)
(ii) the potential to give monetary services linked to a easy Aadhaar primarily based e-KYC course of action.
Increased access and usage of smartphones and enhanced online connectivity into unbanked locations will only boost the user base for digital payment items.
- How digital payments’ market will be impacted when the covid scenario is normalized?
The shift to digital payments is most likely to be a permanent 1 and will continue post-COVID-19. Even although quite a few persons have moved away from money simply because of the dangers linked with transacting in a face to face format provided COVID-19, the positive aspects and comfort of digital payments will continue to fuel the development in digital payments volumes and transactions.