Imagine taking a three-month sabbatical over health issues. Now imagine being given a two-month vacation at the end of your sabbatical.
This is exactly what the Reserve Bank of India (RBI) did on Monday.
The central bank gave lenders an additional 60 days’ time to reclassify a loan in default as bad on their books and start setting aside money to cover it. This is over and above the 90-day period according to existing guidelines.
To receive this benefit, the borrower must be someone who has a sanctioned limit of not more than Rs1 crore and the repayment falls due between 1 November and 31 December.
The move has been prompted because of the massive currency withdrawal by the government that rendered 86% of the cash in circulation invalid from 8 November.
The purging of cash had hit repayments hard, especially from the cash-driven rural economy. Small borrowers had stopped repayments as their Rs500 and Rs1,000 notes were not acceptable anymore. Non-banking financial companies, especially microfinance lenders, were finding it difficult to honour their repayments, faced with defaults from their clients.
Consequently, banks were staring at a massive rise in defaults on their loans to agriculture, micro and small industries, traders and the like.
The understanding was that small businesses will take not less than three-four quarters to tide over the cash crunch and needed some leeway on their repayments. After all, the inability to repay arose out of circumstances not within their control.
This being the case, it was unfair to make banks provide money for loans in default when they already have to keep money aside on a mountain of bad loans. As per RBI data, banks had disbursed about Rs25 trillion worth of small loans having a size of up to Rs1 crore as of 31 March. This was 36% of the total loan book of the banking sector.
So, what is the source of unease here? This is a blanket dispensation irrespective of whether the loan is for business, crop loan, home loan or even unsecured personal loan. Like always, there will be borrowers who will game the system and not pay even though they have the ability to pay, akin to a sabbatical taken by giving a false medical certificate. It has been left to lenders to use their better judgment and decide who can defer repayment and get away without being penalized.
RBI, which normally adds every possible caveat to a dispensation, has been too lenient this time. The temporary holiday is a much-needed relief, but it will result in some erosion of the already-questionable credit culture in India.