Indian Loan Memorandums: The Band-Aid Solution That Only Worsens the Wound

Written by: Emily Liu and Lana El-Masry

LEC x UWES Research Writing Competition – First Place

Introduction

The COVID-19 pandemic exposed weaknesses in federal infrastructure across the world, particularly in governments’ ability to maintain financial stability when trade and employment were struck. This was particularly evident in developing nations such as India which struggled to provide citizens with a solution that would provide both short-term relief and long-term stability. One of their primary response policies was the introduction of a six-month loan moratorium of up to 11% of the book value. This was a temporary solution that deferred interest accrual on loans to allow citizens to steady themselves (Sah & Wong, 2021). Despite the Reserve Bank of India’s (RBI) intention to lessen the debt burden on citizens during the pandemic, the actual impact of this policy not only crippled the financial stability of rural residents of India, but also harmed microfinance institutions (MFIs), and ultimately reflected poorly on the Indian government. This policy can be analyzed critically by understanding its short and long-term effects on the country and comparing India’s crisis response strategy with that of different countries. To get a holistic picture of the policy’s value, or lack thereof, this paper will examine the aforementioned topics and the impact on primary stakeholders.

Policy Outline

The loan moratorium was introduced in May 2020 as a temporary relief measure for loan interest during the initial wave of the pandemic. The moratorium began as a three-month period but was later extended to six months in which interest would accrue but would not be payable until after the period was over (Das, 2020). This policy offered deferred installments for principal payments, interest components, bullet repayments, equated monthly installments (EMIs), and credit card dues. This moratorium was either a default option for all customers or an opportunity that borrowers could opt into, depending on the institution. As an effort to mitigate against liquidation concerns and bank run scenarios, deposit withdrawals by bank customers were capped at Rs 50,000 per person (Business Standard, 2020). In theory, this was a quick and easy solution to allow citizens enough time to regain stability after the shock of the pandemic with minimal impact on the country’s macroeconomy. However, the impacts of the policy not long after the moratorium period reveals that this was nothing more than a band-aid solution that caused the wound below it to worsen exponentially.

With unemployment at its peak during the time that the moratorium period ended, the reality was that citizens faced more financial hardship than ever, refer to Figure 1 (Macrotrends, 2021). After losing jobs and other income sources, citizens were in no position to be paying EMIs with an additional six months of interest accrued at the end of the moratorium period. Recognizing this, the Indian government responded with yet another band-aid solution in the form of a one-time loan restructuring scheme. This offered individuals and SMEs the opportunity to provide evidence of financial stress, which once approved would allow the moratorium to be extended for another two years following the initial six months (Das, 2020). Instead of addressing the problem at its core, the government continues to suppress the country’s financial qualms with band-aids over band-aids which ultimately caused the country to suffer for a longer period than necessary. This suffering materialized primarily against three main stakeholders, the citizens, MFIs, and the government themselves.

Impact on Stakeholders

Rural Citizens
With over 64% of the Indian population residing in rural areas, it is critical to evaluate the impact on rural residents when evaluating the efficiency of government policy (Trading Economics, 2023). A survey of rural residents who were clients of MFIs showed that close to 70% reported a reduction in income of over 50%. Agriculture workers’ income fluctuates with agricultural cycles therefore, income regrowth can take up to 24 months (Augsburg & Malde, 2021). Farmers are also much more indebted than the average citizens as they rely on borrowed capital to keep up with the capital requirement for business (Sandhya & Ravi Kumar, 2013). This leaves rural residents in need of further government support after the loan moratorium time period. The one-time restructuring policy is beneficial in that it can lower the number of defaults on debt. However, many citizens are concerned about the impact on their credit scores which inherently decreases their borrowing capacity and increases their borrowing cost (Resurgent India, 2021). The interest accrued on interest caused by the moratorium also raised the concern of paying off debts promptly for many citizens and they worried about holding liabilities for a longer time (Das, 2020). For rural residents, the negative overall long-term impacts of this policy greatly outweigh the short-term positive results.

Microfinance Institutions (MFIs)
Microfinance has been praised for promoting financial inclusion in India after increasing accessibility to formal financial services for poorer citizens (Kar, 2018). The negative impacts the loan moratorium had on the MFIs primarily impacted the country’s poorer citizens. The policy’s allowance for citizens to not pay their EMIs for six months inherently increased the loan outstanding from MFIs. This was due to the decrease in loan collection efficiency caused by the same policy. Many MFIs were at risk of shutting down during COVID-19 due to their increased likelihood of defaulting (Dubey & Sirohi, 2021). Had they done so, many lower-class citizens would have been excluded yet again from financial services, and yet the government did nothing to intervene. The failure of MFIs not only impacted the financial system but also the livelihood of the working microfinance loan officers. During the period of the loan moratorium, financial loan officers’ stress was at an all-time high and mental health was at an all-time low (Czura et al., 2022). In conclusion, both workers and the institutions in the finance sector were negatively impacted by the implementation of this policy.

Government of India
The loan moratorium policy was intended to provide leeway for citizens’ debts during unprecedented times. Many other countries adopted similar policies in hopes of cushioning the hard economic impacts of COVID-19 however, the Indian government’s policy was unique in duration and scope (The Economist, 2020). The inefficiency of the policy ultimately had a negative impact on the reputation of the government. Despite implementing this policy as an effort to alleviate financial pressure on citizens without moving said pressure to the financial institutions of the country, the loan moratoriums have only put both parties in a worse position than they began in. As aforementioned, the extended moratorium and restructuring plan set both citizens and MFIs up for failure, but a deeper analysis reveals that this policy was not only a poor aid strategy for the country but ultimately a scheme to line the pockets of the Indian government under the guise of financial aid. As the majority of major banks in India are owned by the government, the interest on interest spawned from the moratorium plans was a significant source of income for the Indian government for a year until the Supreme Court stepped in to halt this corruption in the interest of the citizens (Raveendran, 2020). The Indian government has been renowned for corruption in all sectors and levels and this policy stands for yet another example of their breach of fiduciary duty to citizens, letting them down in their most dire time of need (Katyal, 2022).

Widening the Class Gap

The already prominent economic inequality in India was further emphasized by COVID-19 and the implementation of the loan moratorium policy. Not only were MFIs, which primarily deal with lower-class citizens, impacted but the growth of the middle class was also stunted. Over 32 million Indian residents were driven out of the middle class and into poverty in 2020 (Singh & Kumar, 2021). Many of those citizens lost their jobs and were forced to rely on the moratorium policy as a means to avoid further indebtment (Findlay, 2020). The inefficiency of the policy led to the same prolonged impacts on the middle class as it did for the rural residents. The short-term benefits were clear with lower EMIs and defaulted loans. However, the ‘restructured’ title on all loans held by an individual and the inability to borrow until restructured loans were paid off had a much more negative impact (Resurgent India, 2021). Ultimately, India’s attempts to lessen the class gap were inhibited by the loan moratorium policy.

Implications and Relevance

The negative snowball effect of the loan moratoriums prompts the question of what possibly could have been a “good” policy against the economic shocks of the pandemic. When confronted with such a widespread and impactful problem, the government is required to respond quickly with a limited number of options to choose from. Depending on a country’s governance and resources, they can choose to either provide citizens with the resources to sustain themselves or wait for them to acquire said resources on their own.

From the case of India’s response, it can be understood that deferring the problem to a later date in hopes of financial recovery in the meantime will not solve the root problem and will instead worsen the existing weaknesses. Although the moratorium was intended to be a temporary policy for a quick solution, it failed to do any forward thinking which resulted in longer-lasting negative implications. This left citizens confused and in even more debt than before. The government’s inability to address the existing root problem of overwhelming debt and instead burying them with deferral policies, lead to worsened debt burdens with COVID-19.

India was not the only country to look towards moratoriums as a solution during the pandemic. Similar choices and consequences can be observed in two extreme cases, Malaysia and Singapore, which offered citizens 55% and 10% book loan value moratoriums respectively (Sah & Wong, 2021). Though both countries implemented moratoriums, both policies differed from India’s in that they each set limitations on eligibility. In the case of Malaysia, they only allowed citizens that had lost their jobs during the pandemic to take advantage of this policy (Tan, 2020). Singapore’s policy applied only to property loans (Kit, 2020). In contrast, India had not restricted the citizens who could take advantage of the loan moratorium, which led to multiple citizens leveraging the policy though they were not in need of it (Augsburg & Malde, 2021). The lack of restrictions on who could access the loan moratoriums led to increased demand that accelerated the collapse of MFIs which inherently led to economic turmoil.

In contrast, an example of a country that provided citizens with the resources to tackle their financial challenges instead would be Canada through the Canada Emergency Response Benefit (CERB) and Canada Emergency Wage Subsidy (CEWS). CERB was a cash stimulus provided to citizens under a certain income level and CEWS was a program to provide employers and businesses with a subsidy to afford to keep their employees (Department of Finance Canada, 2020). In this scenario, the government stepped forward to take on the majority of the financial burden imposed by the pandemic and provided citizens with the necessary resources to live their lives as normally as possible while they orchestrated various monetary policies to restore the economy back to its original state. The positive consequences of this stimulus were a minimal proportion of Canadian citizens with household economic concerns (Figure 2) and minimal effects on consumer confidence despite the severity of the pandemic shock to the Canadian economy.

When comparing the scenarios of cash stimuli and loan moratoriums, the focal point of this analysis should be which solution provides the best support for citizens. After understanding the impacts of both financial aid options available to governments during the initial pandemic, between providing citizens with the necessary resources for sustenance versus waiting for them to acquire them on their own, the numbers show that quantitatively and qualitatively, the cash stimuli left citizens in a much better financial position than expected after the aid period ended in Canada versus in India. Figure 3 highlights the success of the CERB and CEW stimuli in comparing the pocketbook and expected diffusion indexes which describe Canadians’ perceptions related to personal finances and job security to their perceptions of aggregate economic strength and real estate value. This positive self-evaluation speaks volumes in the context of the economic animosity in Canada during 2020, the first peak of the pandemic, thus confirming that the stimuli provided Canadians with the necessary financial aid to have confidence during this time. In stark contrast, the public polls regarding Indian citizens’ satisfaction with the moratorium plans yielded much less confidence and security. Of the citizens that opted into the loan moratorium, 55% of them considered further deferring their payments with the restructuring plan, and of those who did follow through with the restructuring, 70% still feel a need for lenders to offer some form of relief in their loan repayments (ET Bureau, 2020). Therefore, with both short and long-term impacts considered, it is ultimately better for citizens when governments provide them with the necessary resources for relief rather than waiting for them to acquire them on their own.

Conclusion

After analyzing the policy itself, its impacts on various stakeholders, and comparing it to countries with similar policies, this paper outlines the primary impacts of the India loan moratorium policy on the country’s citizens both in the long and short term. The policy allowed citizens a six-month deferral on their EMIs in hopes that it would allow them to navigate the financial instability the coronavirus pandemic created. This paper investigates the impact of the policy on three primary stakeholders; rural citizens, MFIs, and the government. The analysis indicates that while the policy did have a short-term positive impact on citizens, was ultimately outweighed by the negative implications on the aggregate economy. The rural citizens were left with more overall debt due to the accruing interest and the restructuring policy. MFIs, which primarily work with lower-income citizens, were increasing their loans owed which led to inefficiency in the financial system. Additionally, the government, operating under limited choices and resources, developed a negative reputation for its inefficient fiscal policy. Although the concept of loan moratoriums is not faulty in itself, the failure of this policy began its execution and only continued to worsen as it was dragged out in an escalation of commitment. In summary, it can be concluded that the inadequacy of the Indian loan moratorium policy resulted in the peril of its citizens, financial institutions, and reputation overall.

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