Will there be interest on deferred payment of interest?
The pertinent question on policy punctiliousness is the subject of deliberation in the Supreme Court hearing a petition on the scheme of the six-month government moratoria on loans, which allows borrowers a pause on repayments. The question, the government counsel clarified, would be answered on June 17.
The critical and unstated question is whether loans taken when the economy was growing at around 5 per cent can be serviced when the economy is expected to contract/shrink by 5.2 per cent. As of now, the fog of the COVID-19 war is providing cover to borrowers and lenders. But the tenure of moratorium will come to an end soon — the causes of delay and default may vary but the impact will be similar.
The silent eloquence of the question and the circumstance is haunting financial institutions and, therefore, economies the world over. The issue of ‘what after the moratoriums end’ assumes centrality as politicos and regimes hurry to put the pandemic behind and economies back on the rails — even as the unlocking of economies is trapped between ifs and buts of cases and conditionalities.

It may be seductive to buy into the seductive punt of the stock markets — which seem to be choosing to buy into futures beyond the valley of shadows. But the optics of optimism is in stark contrast to reality reflected in forecasts by the World Bank, the IMF, the RBI, the OECD and the US Federal Reserve Board, of economies eviscerating.
John Locke introduced the world to the construct of the law of unintended consequences — the fate that frequently follows policies which deliver perverse outcomes. The pandemic has introduced the world and the Indian economy, particularly, to the law of unattended causes. In theory, the time under lockdown allows regimes to build capacity. The theory is in suspended animation — and this is illustrated by the incapacity of governments to bridge the gap in health care, in bed capacities in Delhi, Mumbai and elsewhere in the world.
Moratoriums, credit backstops and payroll bailouts are essentially a lock down on economic consequences. They are meant to afford regimes to pave a way out of the pandemic for economies. But paving blocks are scarcely in place. Analysts in the US and the EU are predicting an apocalypse of sorts in the home mortgages — the filing for bankruptcy by Hertz signals trouble for asset-based securities. In the emerging economies, small and medium enterprises are the worst hit — caught in the double whammy of demand and supply shocks.
The India Story is one of aggravations stemming out of the legacy of pendency. We know from epidemiologists that pre-existing conditions adds vulnerability. Non-bank finance companies, the last mile capillaries which keep Indian entrepreneurship alive, are stranded between liquidity and insolvency — the case history of IL&FS and DHFL, pending resolution for over two years, with over Rs 2 lakh crore outstanding, illustrate the level of sloth.
The pandemic has worsened their state. Roughly a third of the loans of private lenders and two-thirds of public sector banks are under the government moratorium. As sectors struggle to open up and find demand, the flow of EMIs will depend on whether the borrower has jobs and that of instalments on viability of businesses. Arguably not all the loans will flail but what if even a third of the 30 per cent fail? Even before the COVID-19 pandemic, nearly `10 lakh crore of bank loans were defined as stressed loans and the NPAs of NBFCs is estimated at around `3 lakh crore. Do the math to appreciate the magnitude.
The financial sector is essentially a web of carefully crocheted connectedness. Public savings flow into financial instruments — deposits, bonds and mutual funds — in the quest of returns. These are channelled into the credit markets for the borrower to access for a fee. Loss of jobs will shutter growth in retail credit outfits. Failing enterprises will cause a cascade of consequences — those who can’t pay banks/lenders are unlikely to pay vendors who are mostly medium and small enterprises. The MSMEs will be constrained in their ability to service their loans. The silt accumulating downstream will affect savers access to savings.
It is instructive to appreciate that while the moratorium of payment is available for borrowers, there is no pause available for institutions which borrow to lend. Banks, NBFCs and funds, which keep the credit cycle running and are strapped for liquidity, must assure encashment of deposits, bonds and investments. The systemic risk posed by the gap in the credit cycle left unattended calls for urgent action — a special programme to recapitalise banks, a plan to ring fence stressed loans to insulate the gears that keep the economy moving.
The challenge in India is greater than in developed economies. Elsewhere central banks opened their vaults to fund the liquidity gap purchasing even downgraded bonds and governments have expanded stimulus programmes to preserve jobs and prime growth. India’s stimulus announcements may have flattered but have flailed and fumbled in addressing faultlines.
It is time to dump presumptions of the past. India needs a new budget — a plan to curb expenditure, raise resources and revive the India Story.