Relief and rigour- canons of restructuring loans


By DM Deshpande

The pandemic has impacted businesses large and small barring a handful few in a way that has no parallel. Even the global financial crisis of 2008 pales in front of the damage caused by COVID-19.

The RBI has generally acted quickly and taken cognizance of the serious problems of the industrial firms. First, it instructed the commercial banks to offer a moratorium in payment of Equated Monthly Installments (EMI) to eligible borrowers. On August 6, it issued a circular to banks to restructure loans to corporates so that it could mitigate their severe financial stress. In doing so, it has struck a nice balance between relief and rigour-both principles are unexceptionable during crisis times.

If it were to err on the side of relief, that would put the banks’ financial health in some sort of jeopardy; they especially the PSU banks are reeling under unprecedented levels of NPAs. At the same time, this is no time for RBI to apply ‘rigour’ rigorously for, that would have made life difficult for more than 70 per cent of all the firms that are impacted by the pandemic.

The same principles have been carried forward by the apex bank now in September based on the recommendations of the Kamath committee on restructuring loans. It has prescribed five financial parameters covering 26 specific sectors that will help banks in determining the cases eligible for restructuring.

Actually, a bank which has a live and going relationship with a firm does not need external inputs to take a call on whether or not it is prudent to recast loans. But a typical problem of banking in India is that the bank officers are often alleged to have ulterior motives to restructure loans of a specific or a certain number of corporate borrowers. These parameters will help banks, especially the PSU’s, to ward off such issues and decide based on a framework given by the RBI.

Since this is Covid 19 relief plan, the RBI wants to ensure that it is not used for NPA cases that existed prior to March 1 2020. This is as it should be; however, banks deal with all borrowers and NPAs pre and post- COVID-19. While extra leniency is not needed a certain flexibility is required to deal with specific cases. It is in the interest of banks to proceed quickly on the issue of restructuring loans, they may, yet, take a while for them to apply Kamath Committee norms.

If they do not act quickly, it will only add to woes of mounting NPA’s. Therefore, it is only logical that the RBI continues the EMI moratorium at least till such time that the bank does not decide on restructuring of loans. Secondly, the RBI should direct the commercial banks to put loan classifications on hold till such time that the bank decides on individual cases. In respect of large loans, usually there is a consortium of lenders; a restructuring plan needs consent of all the parties concerned which by its very nature is a complex and time consuming activity. 

All plans that have an exposure of Rs1,500 crores or more will be vetted out by the Kamath panel. While restructuring gives immediate relief and an action plan, larger issues still remain. According to an independent study by Nomura, 30 to 35 per cent of the corporates do not fulfil the stringent Kamath Committee norms. Which means,  banks have no escape from the problem of having to tackle rising NPA’s later if not now. Giving more time, as per RBI norms-two years time frame is prescribed for payment of restructured loans, is a sensible option for both the parties.

Banks are not required to take equity in a firm after taking a haircut and companies are not burdened with debt servicing when the business is only slowly inching towards a semblance of normalcy. 

This is all the Central Bank could have done. It has embarked upon a massive restructuring plan that is estimated to cover Rs.8.4 lakh crore or 7.7 per cent of the outstanding loans. According to a stress test carried out by RBI, the pandemic impact could see a rise in NPAs to an unprecedented 20 year high of 12.5 to 14.7 per cent of total loans in 2020-21. Thanks to the restructuring plan, there will be no immediate problem of NPAs but it is a challenge that also depends upon how efficiently and diligently individual banks implement the restructuring plan.  

Now the ball is in the government’s court. It has promised equity infusion to small and medium firms hit by COVID-19. It should act quickly on the issue as fall in the GDP growth has brought to the fore the urgency of providing relief. Secondly, the government ought to think of buying equity in some large firms, too, in the larger interest of the economy and all stakeholders.

In the wake of the financial crisis in 2008, the US extended Troubled Assets Relief Program to firms in acute distress. Later, when the economy recovered and businesses started making profits, the government sold equity and earned decent returns. Given the present conditions, it is worthwhile emulating this policy prescription. 

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.