Loan moratorium may restrain banks from proactive recovery: Moody’s

The loan moratorium that India, China and other countries have implemented amid the Covid-19 crisis will give borrowers temporary relief, but will restrain banks from taking proactive recovery action and could widen their credit losses once the directive is withdrawn, according to Moody’s Investors Service.

In a report on the Asia Pacific region, Moody’s said on Tuesday that while policy stimulus will shore up credit quality for larger companies in sectors including airline and oil & gas, Asia’s banking sector profitability will also decline from deteriorating asset quality and lower net interest margins.

“Financial regulators in China, Australia, Malaysia, India and some other Asian economies have enacted debt moratoriums to soften the liquidity crunch for businesses and households. While repayment delays will provide temporary relief to borrowers, these directives will also constrain banks’ abilities to take proactive restructuring and recovery actions. These measures also could lead to an even greater build-up of credit losses once the moratoriums are lifted,” Moody’s said.

The rating company said although India’s credit profile may be insulated from external risks, a prolonged period of much weaker growth will raise its debt burden from already high levels.

According to the report, policy responses from the governments of the region will help mitigate credit-negative pressures on companies, banks and the broader economy.

However, these efforts are unlikely to prevent deteriorating credit quality and, in some cases, may result in outright defaults for smaller companies with weaker liquidity profiles, it said.

“The coronavirus is exposing vulnerabilities in existing systems and we expect policy space to be constrained for economies with existing fiscal challenges or elevated external vulnerabilities,” said Moody’s assistant vice president Deborah Tan.

While pointing out that India’s stimulus measures have been on the lower side at 0.8% of gross domestic product due to fiscal or institutional constraints, Moody’s noted that “the share accounted for by direct government spending is relatively modest and most support takes the form of indirect measures, such as guarantees.”

The report highlighted that large companies in strategically important sectors such as state-backed oil and gas companies will be the most likely to receive direct financial assistance and benefit from other measures.

Packages for small and medium enterprises have largely taken the form of tax breaks, discounts and exemption. Such measures help to alleviate short-term liquidity constraints but do not directly compensate for revenue lost during shutdowns, the report said.