The Reserve Bank of India (RBI) has provided some relief to small borrowers and firms struggling to make repayments on their loan dues due to a shortage of cash. In a press release issued on Monday, the RBI offered an additional 60-days to certain categories of borrowers to make good on their dues. The relief extends to non-banking finance companies (NBFCs) and microfinance institutions (MFIs) which have seen collections fall sharply due to the shortage of currency.
The decision was taken following representations from the industry suggesting that small borrowers may need additional time to repay dues due to the cancellation of Rs 500 and Rs 1000 notes, said the RBI.
On November 8, the government announced that notes of Rs 500 and Rs 1000 would no longer be legal tender, which effectively pulled out 86 percent of the currency in circulation by value. While the currency is being replaced with new Rs 500 and Rs 2000 notes, the process is expected to take some time.
In the interim, the RBI has given some segments of borrowers an additional 60-days to make repayments. The measure will prevent a spike in bad loans due to temporary delays in collection of dues. The regulator has, however, specified that the provision can’t be applied to loans that are already classified as non-performing assets (NPAs).
Who Gets Relief?
According to the RBI’s press release, running working capital accounts, where the sanctioned limit is within Rs 1 crore would be provided relief.
Also term loans, whether business or personal, where the original sanctioned amount is less than Rs 1 crore would also be eligible for the extended repayment period. This includes loans on the books of NBFCs and MFIs, said the RBI. Last week, BloombergQuint reported that microfinance companies had seen a sharp fall in collections due to the unavailability of cash.
Bank loans given to NBFCs, microfinance companies, housing finance firms will also be covered under the forbearance.
It (the forbearance) applies to dues payable between November 1, 2016 and December 31, 2016. REs (regulated entities) shall note to ensure that this is a short-term deferment of classification as substandard due to delay in payment of dues arising during the period specified above and does not result in restructuring of the loans.RBI Press Release
Is This Enough To Tide Over the Cash Crunch?
The additional time given to small borrowers will help NBFCs but may not match up to the expectations of stakeholders, said Religare Capital Markets in a note.
The above move is positive for NBFCs. However, in our view, stakeholders were expecting slightly higher relaxation: For example, relaxation of more than 90 days instead of 60 days as many industries will take time to get out of the mess. Relaxation could have been bit longer like for 6 months to 12 months instead the RBI has given only 1 time relaxation.Religare Capital Markets
Bank of America-Merrill Lynch noted that almost all vehicle and home finance businesses will benefit from the RBI’s special dispensation.
In our view, almost all of the vehicle finance and a lot of the home finance businesses, which sit with non-banks will see major relief. Hence, this is timely action by the RBI, in our view. Micro-small loans, which make up 15 percent of the system bank loans, have an average ticket size of Rs 5 lakhs. Most agricultural loans will also qualify, given an average ticket size of Rs 1 lakh. Finally all retail loans (ex-home loans) will also have a smaller ticket size. If effect, about 60-70 percent of the loan book should be covered by this reprieve.Bank of America-Merrill Lynch
According to Ratna Vishwanathan, chief executive officer of the Microfinance Institutions Network (MFIN), while the industry was looking for some dispensation, a move like this could be potentially misused.
We were looking for some form of dispensation. However, for NBFC-MFIs, the fear is that people with a vested interest could encourage the industry’s 3.5 crore women borrowers not to pay their dues on time even if they have the ability to do so.Ratna Vishwanathan, CEO, Microfinance Institutions Network
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