Independent Research and Policy Advocacy

Does moratorium affect loan repayment behaviour?

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Governments and lenders provide loan moratoria to help struggling borrowers, particularly during an economic crisis. While it can provide relief to borrowers, such a policy also has a possibility of inducing moral hazard among the beneficiaries. But it is difficult to segregate the effects of the crisis itself from that of moratorium as a relief measure, on loan repayment behavior. In this paper, we use an unanticipated announcement of lockdown to curb the spread of Covid-19 in India on March 25th 2020 to estimate the impact of moratorium on loan repayment behaviour. The Reserve Bank of India announced a moratorium on March 27th 2020, on payment of all loan instalments falling due between March 1, 2020, and May 31, 2020. Borrowers whose loans were due in the last week of March 2020, i.e., between March 25th to 31st, 2020, but were not able to repay due to lockdown restrictions, thereby availed the moratorium during March 2020. Whereas borrowers whose installment due dates were between March 1st-24th, 2020, and had already repaid their installments before the lockdown, could only avail the moratorium from April 2020 onwards. We use this arbitrary date cut-off imposed by the announcement of lockdown for the identification of causal impact of one extra month of moratorium on borrowers’ loan repayment behavior post the moratorium. We find that an extra month of moratorium led to a 6.4 percentage point higher monthly default rate and a 2.5 percentage point higher Non-Performing Assets (NPA) classification rate among borrowers after the moratorium. We also find an additional month of moratorium led to a higher NPA classification rate among individual loan borrowers (5.6%) compared to joint-liability group loan borrowers (2.4%) who are peer-monitored, suggesting moral hazard could explain the observed borrower behaviour post the moratorium.


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