Covid-19 Impact: Lenders Stop Physical Loan Collections Amid National Lockdown 

With Prime Minister Narendra Modi announcing a 21-day national lockdown on Tuesday to counter the spread of the novel coronavirus, lenders have now put some of their retail loan collections on hold, according to three people aware of the development.

This includes physical collections on repayments from microfinance, housing and passenger vehicle loans, among others, the people said. The suspension on collections will last for three weeks and lenders will take a call on future repayments thereafter.

The microfinance industry has suspended its collections during this government-mandated lockdown, Harsh Shrivastava, chief executive officer at industry body Microfinance Institutions Network, told BloombergQuint. According to Shrivastava, all of MFIN’s members have been asked to inform customers that collections will resume only after the lockdown ends, and that they should keep the installment money with them.

“MFIN is in touch with the RBI to ensure that the 56 million microfinance borrowers continue to get support from their lenders, not just now, but when the lockdown lifts and life resumes,” he said.

According to the head of a South India-based private bank, who spoke on condition of anonymity, some state governments have asked banks and other lenders to stop repayments for a few weeks, since multiple states had already gone under lockdown this month, before Modi’s announcement. Banks have had to comply with this.

On Thursday, Tamil Nadu Chief Minister Edappadi K Palaniswami said that any private bank, small finance bank or microlender conducting collections during the lockdown period would face criminal prosecution.

While physical loan collections are on hold, banks are continuing to collect payments electronically.

A second banker, the head of retail and small business lending at a leading private bank, who spoke on conditions of anonymity, said that the suspension would not apply to loans where customers have been repaying electronically. Since these customers give their consent for direct debit of their account at the beginning of the loan, these repayments will continue.

However, if the banking regulator were to come up with a scheme for deferment of repayments, banks would suspend collections, the second banker said.

The RBI would need to come out with a clear communication soon to avoid any further confusion, Bindu Ananth, chair at Dvara Trust, said.

“This is avoidable. We know the writing on the wall, which is why it is important for the RBI to proactively put the message out to say that they want the lenders to stop collections for a while and this is what we are providing in the form of support to lenders managing their liquidity,” Ananth told BloombergQuint. “If we don’t move fast, we’re going to see more state-level interventions.”

Should payments be suspended, the banking regulator may need to come up with a special liquidity window for lenders, where they can access funds to continue lending further, Ananth said.

In a report released on Thursday, rating agency ICRA Ltd. said that non-bank lenders could see a sharp rise in their default rates and credit costs owing to the impact of Covid-19-related disruptions. Loans toward retail housing, affordable housing, vehicle finance, small business loans, real estate and other sector could see 50-100 percent rise in their default rates and credit costs, it said in a report.