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A half-baked ‘One-time Loan Restructuring’ Can Be Counter-productive

We need a more well thought through loan restructuring scheme that can bring growth back on track and keep the spirit of entrepreneurship alive.

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A combination of the disruption caused by the COVID-19 induced lockdown, a decelerating economy and rising NPAs in the financial system had heightened the demand for a one-time loan restructuring window for quite some time now. RBI’s monetary policy in August did come up with such a scheme for corporate as well as for individual borrowers. However, the thought process behind the policy and seems to be not in sync with the ground realities. By laying down specifics like eligibility criteria for the scheme and by setting deadlines for the various phases of the restructuring plan, RBI has actually curbed the operational freedom of the players. Given the fact that the pandemic situation is far from over and there is no clarity on when things may return to normalcy, RBI should have ideally left the restructuring exercise to the lenders and borrowers, as is done in most developed nations. The restructuring is purely a commercial decision.

The lender, on the basis of the assessment of the borrower’s future cash flows post the pandemic and the likely value of the assets and collaterals, should be best placed to decide what the optimum restructuring plan should be. All cases are unique in themselves and it is the lender and borrower who need to consult and work out tailor-made restructuring plans. Based on its assessment of financial and systemic risks in the system, RBI should, at best, prescribe general provisioning requirements or suggest revisions in the capital adequacy ratio for the lenders. Alternatively, the framing of the guidelines should be left to the expert committee created under the chairmanship of eminent banker Mr. K. V Kamath with the mandate to recommend sector-specific benchmark ranges for financial parameters to be factored into resolution plans for borrowers with an aggregate exposure of Rs. 1,500 crore or above at the time of invocation. The committee, in consultation with various stakeholders, can draft the guidelines and such a consultative approach would be the best democratic way forward for consensus building instead of an outright imposition of rules which may not be in the best interest of everyone.

The guidelines, in the present form, are fairly unrealistic and the conditions are quite stringent:

(i) Loan account to be ‘standard’ as on 1st March 2020
This condition to exclude such accounts which are already overdue by more than 30 days (as on 1st March 2020) can affect revival plans of those companies which were about to regain profitability but got hit when the lockdown was imposed. Thus, scope of the scheme should be expanded to bring under its coverage those loans, at least the corporate ones, which were overdue essentially because of the slowing economy.

(ii) Loan account to remain ‘standard’ till invocation
The timeline for financial institution(s) to invoke a resolution plan till December 31, 2020 is highly impractical. Suppose a borrower whose account was ‘standard’ till 1st March 2020, avails the 6-month moratorium offered because of the lockdown. So, till 31st August, 2020, he makes no repayment. Thereafter, he has to make the payment for the last 6 months in addition to the payments due in the month of September, i.e. a total of 7 months’ payments in 1 month. Given the fact how revenue streams of most players got severely disrupted because of lockdown, it is unrealistic to assume that the borrower will be able to settle all 7 months’ repayments at one go in September, until and unless he has enough reserves, in which case he would not have needed a moratorium in the first place. Thus, many borrowers are likely to falter in making such payments in September and thereby slide into the ‘special mention account’ category. Thus, by losing the ‘standard’ classification, such accounts will automatically become ineligible for the restructuring scheme driving up the NPAs to alarming levels in the financial system. This, in effect, defeats the very purpose of the restructuring.

(iii) Inadequate functional capacity
Given the fact that the economic activity is limping back to normalcy and many employees in the financial sector are still working from home, it is unlikely that there will be enough capacity in the financial ecosystem that will be ready to handle the deluge of restructuring cases that is likely and the associated paperwork and documentation.

(iv) Cumbersome processes and unrealistic deadlines

The scheme involves the signing of a mandatory inter-creditor agreement (ICA) among all lenders once the resolution plan has been majority-voted for, otherwise they face twice the amount of provisioning required (i.e. 20% vis-à-vis 10%). Restructuring of large exposures will require independent credit evaluation done by rating agencies and a process validation by the Kamath Committee. Given that so many formalities are to be carried out for restructuring, namely independent external evaluation, laying down of sector-specific financial benchmarks by the expert committee, process validation and specific post-resolution monitoring, it makes little sense to set deadlines. When the crisis is far from over, providing a 4-month window to invoke a resolution plan and then get it implemented within 180 days, is not a practical approach.

(v) Exclusion of NBFCs from availing the restructuring window

While NBFCs, like banks, can extend the restructuring window to their customers, they are not allowed to avail the restructuring mechanism from their lenders, primarily the banks. If restructuring is not allowed for an NBFC, it becomes a provisioning issue, while it leaves the NBFC with a damaged credit score. It has to be kept in mind that unlike banks which accept deposits, NBFCs do not have a steady source of liquidity. They raise their resources from banks and other sources and, in turn, on-lend to their customers. Thus, while NBFCs are to extend the restructuring option to their customers, it is only logical for RBI to allow NBFCs to avail this restructuring window too. It must be kept in mind that while there has been an asset-side convergence of regulation for banks and NBFCs, on the liability side the NBFCs are at a disadvantage vis-à-vis banks. Also, NBFCs form a large heterogeneous group, so regulations should not be framed keeping in mind the profile of a few government NBFCs and a handful of large size NBFCs with institutional backing. There exist a whole lot of standalone NBFCs active in different niches who need urgent liquidity support. For example, the infrastructure financing NBFCs have not witnessed any improvement in collections even as the lockdown gets lifted gradually because the sector itself has stagnated due to a plethora of challenges. Thus, the rules applicable on these NBFCs cannot be the same as that applicable on banks, government NBFCs and large institutionally backed NBFCs. The standalone NBFCs definitely need to be allowed to avail the one-time restructuring window at this juncture.

Economic activity in India has witnessed a sharp fall. To ensure that things do not deteriorate, it is imperative to unclog the financial system. For that, the ‘one-time loan restructuring’ window is a very timely move. But in its present form, this half-baked scheme, instead of doing any good, can actually inflict more damage. With loans becoming NPA, many firms can go bankrupt and ultimately end up in liquidation. Apart from discouraging entrepreneurship, the resultant unemployment can be a recipe for social unrest. We simply cannot afford this. Right now, we need a more well thought through loan restructuring scheme that can bring growth back on track and keep the spirit of entrepreneurship alive.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Sunil Kanoria

The author is Ex-president, ASSOCHAM

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