The temptation of phone banking.

"The Reserve Bank of India (RBI) announced an extension of the moratorium on term loan EMIs by another three months i.e. till August 31, 2020 in a press conference dated May 22, 2020." A moratorium is not a loan waiver, so the outstanding amount will not increase just by the total of the missed instalments but by a lot more because of interest on interest. It is hard to understand how a moratorium helps borrowers or the economy. If someone is unable to pay because she has lost her job she is unlikely to be able to afford a higher loan at the end of six months, especially since the prospects of new employment look bleak as the economy is projected to contract by anything from 4.5%, according to the IMF, to 7.5% according to the Bank of America Securities, to 10%, according to former finance secretary Subhash Garg. Naturally, a lot of people and businesses will not be able service their debts come September, leading the RBI warn that "gross non-performing asset (GNPA) ratio of all banks may increase from 8.5% in March 2020 to 12.5% by March 2021 due to the sharp slowdown in the economy". This is based on the 'best case scenario' of a 4.4% contraction of GDP, "gross fiscal deficit of 10.9% and consumer price inflation (CPI) of 4.1%". "India's five largest state-run banks collectively have at least Rs 7.9 trillion of loans under moratorium, including loans that were stressed even before the coronavirus outbreak, regulatory filings show." "if one-twentieth of the loans 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 Rs 12 trillion," wrote Vivek Kaul. A default of one-fifth loans under moratorium would result in bad loans of Rs 20 trillion. How did we get here? "The dominant owner pre-2014 didn't question risk controls in government banks even as it received significant dividends," wrote former RBI Governor Urjit Patel. That is a severe indictment of the Congress-led government which ruled India from 2004-2014, and so controlled public sector banks. "The banks themselves applied little risk analysis in sifting good from bad assets; they kept lending without much (or the requisite) due diligence", probably because of political pressure. "Furthermore, some large borrowers, allegedly, may have taken equity out of the business", which means, they diverted funds for personal use. "India's lenders and their shareholders are playing a dangerous game of hide an seek," reported Bloomberg. "Financial firms need to raise a record amount of capital, something they would like to do before the central bank's Covid-19 moratorium on repayment ends next month and they have to disclose a big jump in bad loans. So they have an incentive to pretend that their borrowers have become miraculously stress-free." The moratorium was ordered by the RBI on instructions of the government. Probably over the phone. Hard to resist.