There is merit in what Mr. Parekh and a few other bankers are saying. It is normal for borrowers to try to maximize their gains, in this case, by delaying payment of installments under the excuse of moratorium offered by their lenders due to the economic slowdown caused by COVID-19. However, it is equally true that there are millions of borrowers (both individuals and corporates) who have lost their jobs, means of livelihood, business turnover, and are struggling to make ends meet. Therefore, it is not difficult to visualize that reality lies somewhere midway.
It is said that there are always 20 percent people who lie on one extreme on any matter, and 20 percent who lie on the other extreme. It is the remaining 60 percent, the fence-sitters, who wait and watch which way the wind blows. They decide accordingly. Of course, these percentages are approximation of real situations, however, for most cases these hold true. For example, 20 percent students will never resort to cheating even if they are left alone and no one is watching them, while 20 percent will find innovative ways to cheat. The remaining decide whether to cheat or not depending on factors such as the severity of punishment if they are caught cheating, the impact on their studies and future prospects, whether others are cheating or not, and if the concerned authorities are serious about preventing it. The same applies to people following or breaking traffic rules (think Delhi and Chandigarh where people are more vigilant because of proactive authorities and severe punishments, and compare it to any town or city in the two states to their East).
Similarly, it would be wrong to think that all borrowers who are not paying their installments are doing so only because they have an excuse in moratorium; and equally wrong to think that none is taking undue advantage. However, it is highly likely that if there is a blanket extension of moratorium, lending institutions will be under undue pressure because they would lose out on potential repayments that borrowers, who are in a position to repay, could make.
Figure A: Conceptual Visualization of Current Scenario
The figure above could be taken as a representation of four broad categories under which a borrower would fall. Although a very simplistic approach compared to the very complex real-world scenario where multiple factors such as the economic sector in which the borrower is engaged, size of the firm, impact of external factors, labor intensive or technology intensive and dozen others would determine the paying capacity; yet, the above categorization is a good starting point for lenders and regulators. Of course, the size of boxes would also be unequal. Lenders would have the actual figures with them; however, it is not difficult to imagine that the blue color box would be the smallest one. How many people who are not in a position to pay, say, having lost their job or livelihood, but would still be paying their instalments? They must be saints, as they would be repaying by cutting on other household expenditures or dipping into their savings and so on. Similarly, hardly any corporates who would be repaying despite a decline in turnover and/or profits. But, if there are any, and there would be, then they need to be treated with respect and should be commended, if possible- publicly.
The yellow and the green boxes may be equal in size, or either could be larger. Again, the actual figures would be with individual lenders, and could even be different for different lenders depending on the quality of their portfolio and follow-up with borrowers. However, the point here is that people who are not able to pay and are not paying, are genuine cases. Whether there is a moratorium or not, they will not be able to pay and at some stage will have to be restructured, provisioned for, and may have to be even written off. Similarly, individuals and corporates who are able to pay and are paying, are rational beings, as they realize that their transaction history and credit bureau scores matter in the long run. They need to be encouraged, and others who may not be aware of the fallout of not repaying should be educated about the merits of timely payment. So, with a little effort, the green box could be enlarged.
The real worrisome category is the red box- those who can pay but are not paying. By personal experience, I can vouch that there are a significant number of such individuals and corporates. Many parents are not paying their children’s school fee because they are expecting an announcement by the government waiving off school fee, fully or partially. They are well to do, have had no adverse impact on their earnings, but are still awaiting an announcement. This, despite the fact that most schools are conducting online classes for their children (and I am mentioning about the people who can pay but are not paying, that is, the red box). Ideally, they should have been in the green box. Similarly, there are millions of individuals, SMEs, salaried professionals, government employees, freelancers and others who are trying to cut corners wherever there is an opportunity. Obviously, any rational being will maximize their gains given an opportunity.
RBI has done a good job by providing a cushion to borrowers, to protect them from economic shock, when it was required. It seems to have worked well. However, in alignment with the process of unlocking and resumption of the economic activities, a logical next step would be to continue providing support to the needy individuals and corporates. Please note, the key word here is “needy”, not everybody. I think banks and other lenders will have to come up with a fail proof plan to identify those in the red box. Let the borrowers approach their respective lenders with an application for extension of moratorium, and let the lenders decide. For businesses and corporates, it must be done on case to case basis, and for individuals they could be categorized by the sector, their income, past payment history, end-use of loan and other relevant factors. It will be difficult, time consuming, and resource intensive, but it will be worth the efforts. Any addition to liquidity available with the lenders, through repayments that are stuck and can be unclogged with a nudge/shove/push, will benefit the economy by oiling the financial services industry. At this juncture- every drop counts.