Perhaps the most reassuring facet of the RBI Governor’s statement on the Monetary Policy decision and related regulatory changes announced on March 27 lay towards the end.

After dwelling on the “extraordinary and unprecedented situation” he concluded that “The RBI will continue to remain vigilant and take whatever steps are necessary to mitigate the economic impact of Covid-19 and preserve financial stability. As I had stated earlier, all instruments — conventional and unconventional — are on the table.”

From a banker’s perspective, while the steps announced to shore up liquidity appear to be adequate, there is a sense of worry whether the changes made on the regulatory and supervisory side will be enough to deal with the uncertain outcome of a still-unfolding crisis, whose impact and dimensions are unknown. What the RBI has come out with is effectively a two-month moratorium on repayment of term loans and interest on working capital loans up to May 31. While this is a highly welcome move, the moot point is whether this would suffice to deal with the fallout of the crisis.

Even on the deferment of the interest on working capital loans, the RBI has stated that “the accumulated accrued interest shall be recovered immediately after the completion of this period”. This would imply that there would be a bulk payment due on June 30 of the interest deferred for a three-month period.

While respecting the regulatory concerns governing supervisory changes and conceding that the RBI’s responses have been beyond reproach, a constructive critique, in the larger interest of financial stability, would be in order.

It is felt that the “unknown unknowns” of Covid-19 might call for a more flexible approach lest it should lead to businesses and households and consequently, lenders “asking for more”, a la Oliver Twist, later on.

What major regulators have done

In this context it would be instructive to look at what two major regulators, those of the US and the UK, have done in the last few weeks, in response to Covid-19.

In an unprecedented move, six regulatory agencies of the US led by the Federal Reserve issued a statement on March 22 (see box 1) which is noteworthy for its flexibility, tone of encouragement to lenders to work with borrowers and an overarching reassurance that “examiners will not criticise prudent efforts to modify terms” (of repayments).

On March 26, these agencies followed up with another advisory (see box 2) which told banks to provide additional loans to consumers and small businesses, going to such lengths as to say, “Such loans can be offered through a variety of structures including open-end lines of credit, closed-end instalment loans, or appropriately structured single payment loans.”

In the UK too, the regulator, the Financial Conduct Authority (FCA), has stopped repossessions of mortgages (see box 3) and stated that it expected lenders to offer payment holidays “whether or not you are already behind on your payments”.

Admittedly, the Indian system — banks included — are known to take a yard, even when only an inch is conceded. There is always a tendency in our country to game the system which might be a regulatory worry.

But what is required of the RBI is a willingness to recalibrate responses and be flexible. Lenders will therefore continue to seek comfort in the Governor’s reassurance.

Box 1

March 22 statement of the Board of Governors of Federal Reserve System : The federal financial institution regulatory agencies and the state banking regulators issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. The agencies encourage financial institutions to work with borrowers, will not criticise institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorise loan modifications as troubled debt restructurings (TDRs). The joint statement also provides supervisory views on past-due and non-accrual regulatory reporting of loan modification programs. The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers

Short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term — for example, six months — modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

The agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected, including those considered TDRs. Regardless of whether modifications are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.

Box 2

March 26 statement of the Board of Governors of Federal Reserve : Five federal financial regulatory agencies today issued a joint statement encouraging banks, savings associations and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. The statement of the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency recognises that responsible small-dollar loans can play an important role in meeting customers’ credit needs because of temporary cash-flow imbalances, unexpected expenses, or income disruptions during periods of economic stress or disaster recoveries. Such loans can be offered through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.

For borrowers who experience unexpected circumstances and cannot repay a loan as structured, banks, savings associations and credit unions are further encouraged to consider workout strategies designed to help borrowers to repay the principal of the loan while mitigating the need to re-borrow. This statement follows other actions taken by the agencies to encourage financial institutions to meet the financial services needs of their customers and members who have been affected by COVID-19. For example, the federal banking agencies issued a joint statement on March 19 informing institutions that the agencies will favourably consider retail banking and lending activities that meet the needs of affected low- and moderate-income individuals, small businesses, and small farms for Community Reinvestment Act purposes, that are consistent with safe and sound banking practices and applicable laws, including consumer protection laws.

Box 3

March 20 statement of UK’s Financial Conduct Authority : Repossessions: Lenders are temporarily stopping repossession actions. During this current period of unprecedented uncertainty and upheaval we do not think people should be at risk of losing their homes. We therefore expect lenders to stop repossession action. This applies to all mortgage borrowers at risk of repossession, whether or not their incomes are affected by coronavirus. Many lenders have already committed to this.

If you are behind with your mortgage payments : We expect lenders to offer payment holidays to borrowers who are experiencing or reasonably expect to experience payment difficulties because of circumstances related to the coronavirus, or another option better suited to your needs and in your best interest, whether or not you are already behind on your payments.

The writer is a top public sector bank executive. The views are personal. For detailed version see www.thehindubusinessline.com

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