What Could be the Economic Impact of Loan Moratoriums?

Loan Moratorium and its extensions have proven both useful and harmful to the economy over recent months! Although this phenomenon can be linked to Coronavirus, let’s investigate what effect such strategies could have on it!

Loan Moratorium: Why Did We Need It? Nation-wide policies don’t always have one singular cause and effect relationship in India due to our demographic diversity – each person having different needs, which makes nation-wide policies challenging to implement effectively.

Loan Moratorium can be explained by several factors.

Before the global pandemic of COVID-19 hit us hard, our spending habits were relatively healthy. GDP grew at about 5-6% annually while inflation averaged 4.5% – meaning our productivity outpaced what our money was losing value at, making this an enviable position to be in post-demonetisation.

As globalisation spread, consumption also rose rapidly – which GDP tracks as purchases and sales. But coupled with this was another factor: mounting debt.

As our economy was in growth mode, debt levels for both capital expenditures and personal expenses steadily rose. Firms were using loans to expand capacities or engage in scams – while the personal loan market expanded from car loans, housing loans, student loans etc.

All this relied on one major assumption – our income stream being steady. But COVID-19 altered all that, making life harder by infecting markets with viruses and restricting consumption due to lockdowns; our income wasn’t exactly steady either as unemployment increased significantly and spending dropped due to lockdown, so even though debt payments reduced cash available for spending, debt payments had to still be made, leading to reduced cash-in-hand in an already depressed stage; thus creating the need for loan moratoriums.