Relief from moratorium and rate cuts are proving elusive for retail borrowers

As livelihoods suffer severe setbacks from Covid-19 and the state-imposed lockdown, Indian policymakers have been quite stingy with their direct support measures targeted at households. In this context, the 75 basis point rate cut and three-month moratorium on all loans (including retail loans) announced by the RBI as a part of its stimulus package were seen as one of the more substantive measures that could free up cash flows for retail borrowers. But with banks and NBFCs adopting their own creative interpretations of this announcement, the initial cheer over this measure has rapidly given way to confusion. Borrowers are now realising that even for a stimulus measure that is officially rubber-stamped by the regulator, there can be many a slip between the cup and the lip.

For one, lenders have adopted divergent policies on operationalising the moratorium. While public sector banks have made the three-month deferment the default option for their retail borrowers and required them to opt out of it by writing in, private sector banks have taken the diametrically opposite view and said that their customers must specifically opt in to avail of it. Some non-bank lenders have made it conditional, insisting on a pristine track record for a borrower to avail of it. While some lenders intend to recover the accrued interest after three months, others propose to adjust loan tenors, adding substantially to the repayment burden. The lack of standard communication practices has left borrowers bewildered too. While some lenders have written to customers quantifying the impact of this deferment on their dues, others have contented themselves with a cryptic SMS or not communicated at all. Given that the moratorium was supposed to take retrospective effect and that most retail accounts had already been debited for their March loan instalment when the announcement came, borrowers are also saddled with the additional task of applying to their banks for refunds. Two, the pass-through of the 75 bps repo rate cut to retail borrowers remains incomplete too. As is their usual practice, banks have immediately adjusted rates on their new external benchmark-linked loans, while older borrowers who are in the MCLR (Marginal Cost of Funds based Lending Rate) or pre-MCLR regimes who make up the majority of retail accounts, need to wait for their annual reset periods to see some adjustment.

Given the extraordinary circumstances that warranted these RBI interventions, it would be good if the banking regulator intervened at this juncture to ensure that the benefits of its stimulus are passed on immediately to retail borrowers. As a one-off measure, banks can be required to give immediate effect to rate transmission on older MCLR and pre-MCLR retail loans. For the moratorium to truly provide relief, it may also be necessary for the interest burden over the three-month period to be reduced with borrowers footing part of the bill, while the subsidy element is shared by banks and the government.

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