By Dwijaraj Bhattacharya, Monami Dasgupta, Misha Sharma, Dvara Research
In the wake of COVID-19 related lockdown and the resultant impact on the financial lives of millions of households, the Reserve Bank of India (RBI) approved a series of regulatory measures, which among others, enabled lending institutions to provide their borrowers with a 6 month-repayment moratorium on term loans. A debt moratorium at this scale has had unique implications for lenders, borrowers and regulators that need careful consideration. Lenders care most about the impact of debt moratorium on credit risk, liquidity and cost of raising fresh capital, while borrowers care most about the cost of debt moratorium and their ability to repay once moratorium is lifted. Regulators on the other hand have had to walk a fine line between protecting consumer rights and ensuring financial stability of the system, in the backdrop of ethical questions being raised about the cost of moratorium. It is these potential implications that motivate us to examine the topic of debt moratorium as a policy measure and its effectiveness in providing relief to the end customer without impacting the financial stability of financial institutions and the system at large. While the actual impact of debt moratorium on both lenders and borrowers will play out in the coming month, this policy brief note provides early insights on the effectiveness of debt moratorium as a policy measure.
This policy brief examines the implications of debt moratorium in the context of microcredit or Joint Liability Group (JLG) loans offered by NBFC-Microfinance Institutions (MFIs), non-MFI NBFCs, Small Finance Banks (SFBs) and Commercial Banks, henceforth referred to as ‘microfinance providers’. Through this research, we attempt to understand how microfinance providers deployed and operationalised moratorium for its customers, its potential repercussions on customer’s repayment discipline and behaviour, the effectiveness of moratorium as a policy tool measure and early lessons learnt. We draw on our conversations with practitioners from different types of microfinance providers to document key takeaways on effectiveness of debt moratorium and perspectives on future course of action that policymakers could take to ease the financial burden on both customers and lenders.
The full policy brief is available here.
