The Moratorium Conundrum: Digital Lenders Suffer Pandemic Blues

 ‘One man’s meat is another man’s poison’

As well-intentioned as it may be the Reserve Bank Of India and the central government’s primary measure to bring relief to the middle-class populace and small businesses has badly dented the other side of the coin. And by that, we mean the very lenders that were asked to support this audience that had been badly hit by the pandemic’s economic impact.

According to reports by the All India Manufacturers’ Association (AIMO) and big data analytics firm Spocto, between 35% and 78% of MSMEs have either downed their shutters or are in the process of shutting shop in India right now. India has currently over 65 Mn MSMEs and even if we go by the more conservative estimate, this results in the closure of 22.75 Mn MSMEs. The startups, too, have been among the worst affected businesses with about 37 highly funded startups including Swiggy, Ola, Zomato, PaisaBazaar have laid off over 12K employees.

According to the Centre for Monitoring Indian Economy, 19 Mn salaried people have lost their jobs since April.

And, it’s not only the startups and MSMEs but also the IT and corporate sector that have been impacted — the likes of Dell and Accenture are said to be in the process of downsizing in India. Anticipating this bloodbath, and to provide some immediate relief to the consumers, the Indian government had announced a moratorium on loan repayments on May 22 which allowed consumers to choose not to pay their EMIs for the next three months, depending on the consensus with their lenders.

This brought immediate relief to millions of consumers and was appreciated widely across the sections of the society. However, this immediate relief was bought at the expense of lenders who had to agree to not get payments from borrowers for three months in the beginning — the very three months when business plummeted to near-zero levels — with the moratorium then being extended for a further three months from July onwards.

While numerous lending startups that are registered as NBFCs were able to get a capital breather through the slew of relief funds made by the FM Nirmala Sitharaman and the Reserve Bank of India, most lending startups that Inc42 spoke to admitted that the implementation of the moratorium policy, the lack of clarity on many aspects and the inadequate redressal mechanism for recoveries post the moratorium have complicated survival for the lending startups.

The bigger question is, will the moratorium send digital lenders to the mortuary?

The Moratorium Issue: Breaking The Chain

The double whammy of the pandemic and the lockdown had already created a lot of complications which were compounded by the economic losses across sectors, the fear factor and repayment challenges. The moratorium threw another spanner in the works.

Ajit Kumar, founder and CEO of P2P lending startup RupeeCircle said that every company’s returns were directly impacted by the pandemic. “The government introduced the moratorium. People were given the choice to halt their EMIs for the next six months which kind of derailed the entire demand-supply game. At one end, people were losing jobs, at another end, the suppliers were not getting their money back due to the moratorium.”

The point was also raised by former RBI governor Raghuram Rajan. In a recent Q&A session, Rajan said that the moratorium will have to come to an end at some point. The longer the moratorium lasts, the higher is the unpaid loan amount and tougher is it to restart the payments.

“Do you recall the Andhra Pradesh microfinance crisis? Once you told people didn’t pay, it became hard to get them back into the payment habit because they have not saved any money. They did not have any money. So, those became serious NPAs and a lot of microfinance institutions were severely impaired after that. The longer we tell people not to pay, the harder it will become for banks to collect anything on those loans,” former RBI governor Raghuram Rajan said.

S&P Global’s Indian subsidiary CRISIL had earlier analysed over 2,300 non-financing companies and found that three out of four entities that availed of the moratorium are rated in the sub-investment grade. “Most of them were grappling with a slowing economy before the pandemic began. The severely curtailed business activity that followed in the first quarter of this fiscal had cramped cash flows,” said the report.

The Moratorium: Different Strokes For Different Folks

There was not enough incentive for the borrowers to avoid paying the small-ticket loans where the EMI was averaging at around INR 5,000. However, consumers found a lot of incentives in delaying the large ticket loans like home loans, where the EMI was extending up to like INR 15,000 to INR 50,000,” Madhusudan Ekambaram, CEO, KreditBee said.

Even though the moratorium was applicable for most of the lending products which had EMI options, it had a varied impact across startups, depending on their exposure, partly due to the diversified nature of products across the sector, and the different relief offered by the government and the RBI for each segment. Further, the moratorium was also dependent on the capital status of lending firms.

Saurabh Jhalaria, head of SME lending at InCred, said the moratorium divided the survival chances of the lending market with firms that were well-capitalised or those that had substantial liquidity being in a better position to survive and generate sales. “These big companies extended the moratorium to the customers but did not avail the same from their own lenders. Smaller NBFCs did struggle because some of the banks refused moratoriums to the smaller NBFCs,” Jhalaria added.

This created tiers in the market and favoured the bigger lenders.

So, on one hand, a small NBFC is expected to extend the moratorium to its customers. But the banks and NBFCs were not necessarily forthcoming and extending the same leeway to the lenders. In some cases where NBFCs had borrowed money from the capital markets, they were not subject to moratorium extension.

There were other discrepancies. For instance, the short-term credit providers such as ePayLater, ProgCap and others suffered the least during the moratorium period and in fact, have regained their market base as well the collection faster.

Uday Somayajula, cofounder of ePayLater, which offers 14-days credit to kirana stores, told Inc42“After the initial slowdown for the two months of April and May, we started ramping up again. However, amid the moratorium introduced by the RBI, we wanted to test the waters before ramping up to speed. So we took a calibrated approach towards scaling up and starting from June we’ve been able to scale up steadily, seeing how the repayments are happening etc.”

Since then, ePayLater has recorded six to eight cycles which Somayajula claimed have been panning out well. The collections have almost reached the pre-Covid levels, the founder said. The company has opened up credit limits to their existing customers. And by October, it expects to recover the business fully.

Similarly optimistic is ProgCap, which has achieved 70-80% of its pre-Covid business. The company offers businesses short-term loans for 30-45 days. The situation is different also because of the nature of frequent loans that retailers need. In order to be able to get their next loan, they will have to clear the overdue, ProgCap cofounder Pallavi Srivastava said.

“While we may have given some kind of relaxation for the first two-three months during moratorium what we observed that most of the customers were still paying the entire amount so that their limits could open up and could borrow more to buy the goods. This was working capital. While in the case of term-loans, the collection has been around 50-60%, in our case, it’s been 98% by now,” Srivastava added.

Amid this broken supply, lending startups needed an immediate funding inflow in order to be able to issue fresh loans and maintain or gain the market share as the demands soar. This could also be seen through the H1 2020 funding report by Inc42 Plus, which revealed the growing funding activity in lending tech. While InCred raised INR 500 Cr in debt, Lendingkart raised INR 319 Cr in equity from its existing investors.

Tackling Moratorium: Impact And Implementation

Startups are clear on one thing: the moratorium’s intention was good, but the execution, as always, could have been better.

Anuj Kacker, cofounder, MoneyTap, said that the different eligibility criteria was the main sticking point. “Had they made it mandatory for everyone, from top to bottom, then everybody would have figured out or it would have been more even in terms of the impact. But, because it is optional, we are getting squeezed in between. This was something that should have been thought through. As the moratorium ends, everybody’s in overdrive for doing collections. We got a lot of our operations team to repurpose into the collection because it is important to get the money back and protect your balance sheet,” Kacker said.

He feels that the issue may last longer than most think. The customers that have not been paying for the last six months will have to pay all the sum total amount now. People who have not been paying the EMIs are mostly the ones who lost their jobs and if such is the case, it is doubtful that a significant portion of the money would come back to the lenders’ account if not already.

“Such a moratorium was never implemented before, lenders who were already struggling to figure out what to do during lockdown were now trying to operationalise the instructions laid out by the regulator.” – Gaurav Aggarwal, business head, Paisabazaar

According to RBI’s stability report, the gross non-performing asset (NPA) ratio of all commercial banks is likely to increase from 8.5% in March 2020 to 12.5% by March 2021. And it would increase further to 14.7% under the very severely stressed scenario.

Startups such as UGro Capital managed to stay on top of the policy by being agile. CEO Abhijit Ghosh told us, “The moratorium was implemented in two phases. What we did as an organization was that we extended the benefits to almost every customer who was willing to exercise it. Now, in the second moratorium, we did the reverse. We said we would evaluate case by case. So what has happened in the first moratorium, we had more than 20% of the customers paying the timely EMIs. In the second phase, we had more than 50% of such customers.”

Kreditbee’s Madhusudan Ekambaram agreed that a lot depended on how companies offered moratorium to its consumers. At KreditBee, 70% of the customers did not opt for the moratorium, he said. “That was a very good healthy mix and by the end of August, we had only 15% of the consumers who had opted with the moratorium,” he said.

But there was some silver lining for lenders. Jhalaria of InCred appreciated the RBI for introducing TLTRO and TLTRO 2.0 which introduced a window where banks can borrow at a lower rate only if they will lend to the midsize and small NBFCs and not to larger NBFCs, or deploy it back to the RBI.

“The rate at which the banks could borrow money from the government to extend to the NBFCs hence have come very handy to plug the gap between what the smaller NBFCs had to continue but were not able to avail the same from their own lenders. This has definitely bettered the situation,” Jhalaria said.

What’s The Way Forward?

“While the moratorium on loans was a temporary solution in the context of the lockdown, the resolution framework is expected to give durable relief to borrowers facing Covid related stress,” said RBI governor Shaktikanta Das on August 27, 2020.

The impact is too real to ignore. While some of the lending startups and digital NBFCs have managed to come up with impressive collection figures, this isn’t the case across the industry.

Author and economist Vivek Kaul wrote, “How bad is it going to get? If one-twentieth of the loans which are likely to be under a moratorium as of 31 August are defaulted on, the overall quantum of bad loans in the Indian banking system would be close to INR 12 Tn. If one-fifth of them default once the moratorium is lifted, the quantum of bad loans would touch a dizzying INR 20 Tn, more than double the current level.”

Taking a broad perspective, lending startup founders estimate that around 5%-20% of their outstanding books are under moratorium and hence the impact will be huge if many of these loans turn NPA.

In such a situation, Jhalaria said that there are a few takeaways. One, there is a need to restructure some of these loans as you can. The government has come out with a one-time restructuring policy for some of the loans. The RBI-appointed experts’ panel led by KV Kamath has recommended a resolution framework for stressed assets. According to RBI, the committee has recommended financial parameters that cover aspects related to leverage, liquidity and debt serviceability. It has recommended financial ratios for 26 sectors which could be factored by lending institutions while finalising a resolution plan for a borrower.

The applicability of the resolution framework is limited. A set of conditions have been laid out for lenders and borrowers to be eligible for the resolution under the framework. For instance, MSME borrowers whose aggregate exposure to lending institutions collectively is INR 25 Cr or less as on March 1, 2020 will not be eligible for resolution.

“The big four and various industry forums are trying to figure out what that means; what kind of extensions are permitted during the extension or a restructuring? Can you charge full interest, half interest, no interest on principal in the case of the retail and MSME segment that we work with? A lot of this is still being discussed at the industry forum with respect to auditors. So I do think some sort of consensus will come in the next couple of weeks. So that’s one impact of the moratorium extension or the restructuring that will need to be brought in for certain loan accounts,” Jhalaria told Inc42.

The ECLGS (Emergency Credit Line Guarantee scheme) too would help raise some capital in case the collection remains low. Subject to eligibility, credit under ECLGS is up to 20% of the borrower’s total outstanding credit up to INR 25 Cr, excluding off-balance sheet and non-fund-based exposures, as on February 29, 2020.

Even if this is the last of the moratorium and it’s not extended, many believe the damage has been done to the lending market. It would take months to evaluate the real impact in terms of the collection deficit that it adds to the lenders. The question is to what extent is it repairable, and will recovery only comes in parts and not for the market as a whole. While the moratorium is said to have a varied impact on lenders, depending on their exposure and sector focus, the recovery needs to be standard and cannot favour the larger lenders as the moratorium has.

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