Non-Bank Lenders Approach Loan Moratoriums Cautiously

Fears of asset-liability mismatches are making non bank lenders more cautious about offering loan moratoriums.

A view of the RBI signage at the central bank’s headquarters.  (Photographer: Adeel Halim/Bloomberg)
A view of the RBI signage at the central bank’s headquarters. (Photographer: Adeel Halim/Bloomberg)

India’s non-bank lenders and housing finance companies are offering loan moratoriums selectively to customers, fearing that a halt in a large chunk of repayments could lead to liquidity stress.

On Friday, the Reserve Bank of India allowed all lenders to offer a three-month moratorium on all term loans and working capital credit. This was done to tide over a period where customers and businesses may face a sudden stop in cash flows due to restrictions placed to curb the spread of Covid-19.

While the RBI allowed banks and non-banks to offer this moratorium, the choice is tougher for the latter as they borrow from banks and the market for on-lending.

Case-By-Case Approach

Most non-bank financial companies and HFCs that BloombergQuint spoke to said they will do a case-by-case assessment of moratorium requests.

Bajaj Finance, one of the largest retail non-bank lenders, has decided to offer the moratorium selectively, according to a report by Emkay Global Financial Services. The relief is being offered only the customers, who do not have more than two EMIs due (historically) in any of their loans, the brokerage house said.

A spokesperson from HDFC Ltd., said the mortgage lender will communicate the moratorium offer to its customers in a day or two.

SREI Equipment Finance Ltd. is also offering the moratorium facility to its borrowers on a case by case basis. The company will provide excess working capital, deferred interest collections and moratorium on repayments for its borrowers, though they are yet to arrive at a clear implementation plan, an official from the company said, while speaking on condition of anonymity.

Shriram Transport Finance Company Ltd. also said that while all customers will be offered the moratorium, such a facility would not be automatically activated.“But they will have to pay the interest on that after the moratorium ends, it is not a waiver on interest on loans. It is the choice of the borrower depending on their capacity to pay,” Umesh Revankar, chief executive officer of the vehicle financier told BloomberQuint.

In contrast, Repco Home Finance Ltd. is providing the moratorium to all of its borrowers automatically, said Yashpal Gupta named, chief executive officer of the mortgage lender. However customers can write to the company or use the website to opt out of the moratorium by April 8.

On Wednesday, PNB Housing Finance sent messages to its customers stating that they can defer the payment of their EMIs, both principal and interest, due between March 1 and May 31, 2020 for a period three months. Customers can opt-in for the facility either by registering on the website or through emails, text messages or missed calls.

Several large non-bank lenders like Indiabulls Housing Finance Ltd., Muthoot Finance Ltd., Cholamandalam Finance and L&T Finance Ltd. told BloombergQuint they are still evaluating the impact of moratoriums and will offer options to borrowers over the next few days.

Asset-Liability Management Concerns

Non bank lenders, who are far more reliant on market funding for lending, could face genuine difficulties in offering loan moratoriums. As loan collections fall, these entities will find it difficult to service interest on their borrowings, leading to what is termed as an asset-liability mismatch in industry parlance.

As such, these lenders would need to secure concessions from their banks and debt investors while offering loan moratoriums to customers. NBFCs also pool their loans and securitise them. Should collections from this pool of loans be disrupted, investors in these securitised loan parcels may also demand compensation from a cash reserve set aside for exigencies.

According to a set of ‘frequently asked questions’ issued by the Indian Banks Association, loans given to NBFCs will not be eligible for moratorium.

At present, they (NBFCs/MFIs/HFCs) are not being considered under the scheme. However, RBI has made provision for sufficient liquidity support to these financial intermediaries under recently introduced Targeted Long Term Repo Operations.
Indian Banks Association FAQs

In light of the potential concerns that may arise due to this mismatch, industry lobby body Finance Industry Development Council, has sought further relaxations from regulators.

The agency has sought a mandatory moratorium on term loans so that their repayments on borrowings are also deferred. The same moratorium should be extended to securitised loan pools as well, the industry group has asked.

“The moratorium for borrowers and not on creditors will lead to an undue mismatch within the industry. Going by the past experience, there is clear evidence that banks suddenly become risk-averse when such shocks take place,” said Raman Agarwal, co-chairman at Finance Industry Development Council. The real apprehension is that the banks will hesitate to provide the moratorium to small NBFCs, he added.

Due to such concerns, analysts too expect non-bank lenders to offer the moratorium selectively.

In a Mar. 30 note, brokerage Emkay Global Financial Services Ltd. said that NBFCs will not offer any blanket moratorium offered to the end-borrowers, but only to those that need it the most. “The borrowers opting for deferment will either have to extend their tenure else increase the quantum of equated-monthly-installments to compensate for the revenue loss for NBFCs,” it said.

Asset Quality Risks

Besides risks of asset liability mismatches, non-bank lenders, like their scheduled bank peers, are fearing a rise in asset quality risks.

Risks are higher for lenders to some segments compared to others, according to rating agencies

The highest risk to banks and non-bank lenders would be in the affordable home loans segment, new and old commercial vehicle financing, agriculture loans, two-wheeler and passenger vehicle loans, microfinance loans, as well as in small business loans, according to ICRA Ratings.

“We see the impact continuing after the lockdown ends, based on the profile of borrowers. Those self-employed, in informal jobs, and earning their salary in cash would bear the brunt beyond the near term because the economy will take time to recover,” said Krishnan Sitaraman, senior director, CRISIL Ratings in a Mar. 30 report.

The risk aversion, in turn, could hurt fresh lending.

Disbursement of fresh loans by NBFCs will reduce substantially in the near team and remain muted in the medium term, while collections and asset-quality will come under pressure if there are any delays in a return to normalcy or change in borrower behaviour on payment discipline, CRISIL said.

Getting the Last Mile Right to Prevent Moral Hazard

This story has been updated to reflect the official comment from a spokesperson of HDFC Ltd.