RBI allows longer moratorium, payment of working capital interest in installment

MUMBAI: The Reserve Bank of India (RBI) on Friday not only extended the moratorium period on loans by another three months but also gave working capital borrowers the option to repay accrued interest in installments.

In a 10am televised address today to announce a 40 basis points (bps) cut in key interest rates, RBI governor Shaktikanta Das said that in view of the extension of the lockdown and continuing disruptions on account of covid-19, the moratorium is being further extended for a period of three months from 1 June to 31 August. The earlier moratorium ends on 31 May.

1 bps is one hundredth of a percentage point. After the cuts, the repo rate now stands at 4% and the reverse repo at 3.35%. The bank rate stands reduced to 4.25%.

“It has been decided to permit lending institutions to convert the accumulated interest on working capital facilities over the total deferment period of six months into a funded interest term loan which can be fully repaid during the course of FY21,” said Das.

There were concerns that as the lockdown has already entered its fourth phase and economic activity is yet to pick up, working capital borrowers will not immediately be able to repay their pending interest in one go. A considerable number of small businesses, hit the hardest by the covid-19 lockdown, have opted for the moratorium.

On 27 March, RBI had said that for working capital facilities sanctioned in the form of cash credit or overdraft, lenders can allow a deferment of three months on payment of interest. However, it had added that the accumulated interest for the period will be paid after the expiry of the deferment period.

“They said that the earlier deferment which the RBI had permitted meant that the entire interest component accumulated during the moratorium had to be paid in one shot. It was posing problems in cashflow management for various borrowing entities,” added Das.

According to Karthik Srinivasan, group head (financial sector ratings) at ratings agency Icra, the repayment of interest by 31 March, 2021 on working capital facilities is a considerably short-period and a longer period could have been considered.

Das added that that central bank has received a lot of representations, not only from banks, but also from borrowers.

Borrower interest in the moratorium has varied across banks. For instance, while 90% of eligible borrowers of Bank of Baroda (BoB) have availed of the moratorium, the number is 20% in case of State Bank of India (SBI). For private sector lender Axis Bank, 10-12% of customers had opted for the deferment of repayments as on 25 April.

Experts cautioned that while the moratorium will allow more time to repay loans, a pickup in economic activity is necessary for borrowers to repay the accumulated dues.

“Such interest and loans have to be repaid as there is no waiver involved and hence it is imperative for economic activity to re-commence so that production increases and they are able to earn their revenue to meet these commitments,” said a report by Care Ratings.

RBI has also permitted lenders to restore the margins for working capital loans to their original levels by 31 March, 2021. “This is one area where we had given three months’ time. This will make it easier for borrowers to manage their finances and their cashflows in a gradual manner,” said Das. On 27 March, the central bank had allowed lenders to recalculate drawing power on working capital loans by reducing margins or by reassessing the working capital cycle for the borrowers.