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RBI Loan Restructuring: Will It Revive The Economy?

Instead of demoralizing the prudent decisions of the banks the RBI should allow the banks to employ one-time loan restructuring scheme to help harrowed borrowers. Banks should be given freedom to fabricate their own internal standards and strategies.

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To alleviate the financial anxiety of impoverished business entities and persons transpired due to lockdown to exterminate the lethal corona virus, during the last week of March 2020, the Apex bank of India had offered a three-month freeze or moratorium for installments of all term loans and advances. Although the amenity was protracted till the end of August 2020, considering the enduring monetary and economic crisis, the RBI has decided to permit banks to restructure of advances of fiscally strained organizations and assigned the task of solemnizing the structure of restructuring of loans to the professional committee.

The committee was headed by former CEO of ICICI K.V. Kamath. Other members of the committee are former State Bank of India executive Diwakar Gupta, current Canara Bank chairman TN Manoharan, consultant Ashvin Parekh and Sunil Mehta CEO of Indian Banks' Association. The committee was formed to scrutinize loans of more than ₹1500 crore. The tenure of the committee has been extended till 30th June 2021. 

The committee has now delivered the finer facts of dealing with stressed lends throughout 26 trade sectors. The expert committee has reported that approximately 72 per cent of banking sector debt has been adversely affected till now. However, around 42 per cent or 22.20 lakh crore rupees of debts were under trauma much earlier and 30 per cent or 15.50 lakh crore rupees of debts have been wedged by the epidemic.

Out of Rs 15.50 lakh crore loans impacted by the pandemic, the largest chunk of loan of Rs.5.42 lakh crore relates to retail trade and wholesale trade. Loans amounting to Rs.1.94 lakh crore and Rs.1.89 lakh crore pertain to the roads and textile sector respectively. Miscellaneous industries to which banks have considerable exposure include engineering (Rs 1.18 lakh crore), petroleum and coal production (Rs 73,000 crore), ports (Rs 64,000 crore), cements (Rs 57,000 crore), chemicals (Rs 54,000 crore) and hotels and restaurants (Rs 46,000 crore). Rs.2.1 lakh crore of loans relates to the retail borrowers and small units.

Debtors or borrowers of the banks which were categorized as standard and with an amount outstanding below 30 days as at March 1, 2020 fit under the frame. The resolution agenda should be appealed before December 31, 2020 and the strategy has to be instigated within 180 days from the date of invocation.

Rickety boat rocked again

When the confidence of depositors of banks is fading, the regulator is not able to restore the power-packed banking system and flood of financial scams are present far and wide, relief offered to borrowers by the RBI by letting moneylenders to offer 180 days moratorium on loan settlement may prove ruinous to the financial solidity of the banking edifice. It will be unjust treatment for banks and even depositors’ return on investment will be at peril. Similarly, the apex bank may land in a pickle.

Additionally, the petition pursuing interest relinquishment on loan moratorium has not yet been addressed by the Supreme Court of India and pulled on since March 2020. A bench led by Justice Ashok Bhushan was hearing petitions requesting a postponement of the loan moratorium and renunciation of accruing interest.

The moratorium measure was proposed to provide temporary relief to the borrowers. Nevertheless interest charged on loans during the deferral time period has augmented the burden on borrowers all moratoriums work in that fashion. For example, the Central government’s credit guarantee scheme provides one year moratorium on the principal excluding interest thereon. While under United States Fed’s Main Street Lending Programme, no principal is paid in the first or second year, but the deferred interest is capitalized and added to the principal amount. Moratorium, by definition, is the momentary deferment of payment of interest or principal or installments, and not a waiver of loan repayments. So the appeal for waiving interest payment under moratorium is not defensible.

Of late, the Apex Court deferred the hearing in the loan moratorium and interest waiver case to September 28 and instructed banks not to state any loan as non-performing asset due to failure to pay installments during the period. Now all eyes are starring at the Supreme Court of India to know whether the verdict will provide tonic or toxic to banks.

Pandemics trouble all from governor to gardener and president to servant. The novel corona virus disease is not an exception to this and brought on astonishing apprehension to all. Therefore, why only banks have to bear the heat? How does one guarantee that depositors’ interests are secured while banks sacrifice a major ration of their revenue? Due to alarming rise in bad loans banks have become partly lifeless and the waiver of interest on loans under moratorium gravely hurt depositors. If a big share of the moratorium book goes bad, then banks’ aptitude to pay depositors would enervate further. There will be cash flow mismatch for many banks too.

The other issue raised by the Supreme Court is waiving of just the interest on the interest accrued. Although it may have an impact of about ₹3,000-4,000 crore to banks’ interest income, the burden could me more for few banks. Large ticket long-term loans such as housing loan where the low percentage of principal repaid in the early years and the interest burden is more. Therefore, in such instances waiver of interest on interest certainly tweak banks and would wreck the credit behavior.

Stringent compliance

Notwithstanding the central bank mentioned the restructure plans are flexible, industry pundits are of the opinion that the plan has many strict compliance regulations. As per the instructions of the committee five financial ratios have to be considered while choosing a recast blueprint namely, debt service coverage ratio, total outstanding liabilities to adjusted tangible net worth, total debt to EBITDA, current ratio, and average debt service coverage ratio. The RBI has stipulated either a lower limit or an upper limit for each of these considerations relating to 26 sectors.

Unfortunately few of the ratios are very stringent. For example, Current ratio and Debt Service Coverage ratio should be 1.0 in all the cases. Adjusted Service coverage ratio should be 1.2.Banks have to assure that the ratio of the total outside liabilities to the adjusted tangible Net Worth is observed with when the recast is executed. As per the strategy, all other vital ratios shall have to be maintained by 31st March 2022 and on a continuing basis afterwards. If there is equity introduction, the relevant ratios should be appropriately phased-in.

Moreover, many questions remain unanswered are whether the industries view these ratios with accurate or inaccurate conviction? Whether lenders are exhibiting coercing attitude towards maintenance of ratios? Whether the borrowers now manipulate presentations to meet these parameters?

Also the committee fixes time period of 180 days to execute the scheme and makes an Inter Creditor Agreement compulsory. A review period of 30 days will be activated and at the end of the evaluation period, if the borrower and countersigners to the inter credit agreement are in default, the asset category of the borrower with all lending establishments shall be considered as non-performing. Earlier of the date of enactment of the plan or the date from which the borrower had been grouped as NPA before execution of the plan will be taken into account. Organizations who did not authorize the inter credit agreement will also be included for the purpose.

Final words

The Indian experience with restructuring arrangements post the international financial disaster of 2008 has raised worries this time also. Loan restructuring announcements made during the fiscal year 2008 to 2011 and 2013 to 2019 had given birth to numerous trepidations due to most of the restructured assets ultimately skidded into the zone of non-performing assets. The RBI terminated the Corporate Debt Restructuring scheme from April 1, 2015. It is open secret that gigantic corporate tycoons were tapping off bank funds though their units wriggled. Many of these business barons knocked the door of banks to get their loans recast under the scheme. Few of them distorted the scheme are in the bankruptcy Court. As well, some of loan recast schemes introduced by the RBI either persisted largely on paper or were ill-treated by borrowers. 

Novel rules prescribed by the RBI largely depend on the substantial reinforcement of the economy. Disastrous decline of GDP in the first quarter of current financial year is likely to show its ugly face in the enduring quarter. Therefore, banks may check the rise of non-performing assets but the inheritance of bad loans of around to Rs 9 lakh crore will remain within the system.

Instead of demoralizing the prudent decisions of the banks the RBI should allow the banks to employ one-time loan restructuring scheme to help harrowed borrowers. Banks should be given freedom to fabricate their own internal standards and strategies. This may eradicate felonies and muted credit growth. With this, banks may regularize the recovery in the economy through augmented lending. 

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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Shivanand Pandit

The writer is a tax specialist, financial adviser, guest faculty and public-speaker based in Goa

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