In the past, many restructured loans were undeserving; this time around, it is restricted to those hit by Covid-19.
Although restructuring of loans is never a good idea, and many of the beneficiaries of the CDR were undeserving of the concessions, the several riders that accompany the new resolution plan make it robust. To begin with, only those companies that were in good shape till February—and did not owe banks money for over 30 days—but whose businesses are in trouble only because of the pandemic are eligible. Governor Das is right when he says there is no point killing businesses, where the promoters otherwise have a good track record, for no fault of theirs. Given these are extremely challenging times, it is only fair to give the existing owners a chance to repay their debt, which has risen in the absence of revenues in the last few months. Players in the civil aviation, transportation or hospitality sectors will hopefully make a quick recovery once much of the country is unlocked.
It is not a free lunch for bankers though. While they would be pleased that they have a chance to salvage some stressed exposures, even as they retain the asset classification as standard, they will need to set aside additional capital of 10%. In fact, there is a higher 20% provisioning requirement for those lenders that don’t sign the inter-creditor agreement within 30 days of the consortium finalising a resolution plan. These conditions will prompt lenders to act decisively and quickly because if a resolution plan doesn’t materialise within the specified timeline, the account will slip into a non-performing asset (NPA).
With an external committee supplementing the central bank’s efforts—not only in setting out the terms and conditions but also in vetting the proposals—neither banks nor borrowers should be able to get away by bending the rules. Indeed, banks have been asked to ensure that the companies transfer their earnings into specified accounts that can be monitored so that these cannot be diverted elsewhere. Promoters will try every trick in the book, so it is just as well these safeguards are put in place. There are also strict timelines, in that the plan has a tenure of just two years. It is critical that lenders are transparent about the exposures they have restructured so that one knows the true quality of the loan book; of late, there has been some concern that they have been camouflaging exposures that are under a moratorium as ‘good’ exposures by evergreening them. Since the restructured accounts are, in reality, stressed, there is a need for investors to be updated regularly and truthfully.
This is particularly important for small businesses since the restructuring scheme for these units has been extended by three months to March next year. Also, the central bank has, not surprisingly, tweaked the rules to allow many more MSMEs to get the benefits of restructuring. Given banks have fairly large MSME portfolios, and the fact that this sector has been the worst hit, it is only fair banks don’t conceal the truth. Governor Das has done well to not continue with the six-month blanket moratorium which ends this month; as bankers have pointed out far too many borrowers—companies and individuals—were misusing the deferred repayment option and it was creating a moral hazard. Now, only those individuals who are genuinely unable to repay their loans will get the benefit of a moratorium. Governor Das has done more than his bit, it is now upto the banks not to make a mess of things.