New Delhi: Implementation of one time restructuring of bad loan accounts hit hard by Covid-19 pandemic lockdown might be easier said than done as there are several unknowns and the economic uncertainty caused by the global pandemic still looms large over the economy, said a top banker.
In its monetary policy announcement, the Reserve Bank of India last week allowed banks to carry out one time restructuring of those SME accounts that were categorized as ‘standard accounts’ as on March 1, just ahead of the nationwide lockdown that came into force from March 25. RBI Governor Shaktikanta Das said the existing one time resolution framework for the SME sector would be operational until March 2021.
The move is being seen as a big relief for the cash starved SMEs as working capital of SME units almost evaporated due to over three-month long complete nationwide lockdown announced by Prime Minister Narendra Modi to slow down the community spread of Sars-CoV-2 virus.
While Indian government announced several relief measures for the businesses and individuals, the Reserve Bank also granted a six-month long moratorium on loan repayment. The moratorium will expire by the month end and the possibility of yet another extension has sharply divided the bankers, industry and economists.
“People who are saying that there should not be a moratorium are suggesting that there should be one time settlement, restructuring,” said Jaspal Bindra, Chairman of Centrum Group, a Mumbai based diversified financial services group.
Jaspal Bindra, who has extensive experience in banking and finance sector, says despite the Reserve Bank’s nod onetime restructuring of bad loans will take time due to uncertainty caused by the Covid-19 pandemic.
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The highly contagious virus has killed more than 7,46,000 people worldwide and more than 46,000 people in the country after it was first detected in Wuhan in China late last year.
The Covid-19 virus also caused unprecedented disruptions in economic activity, which is expected to cause a loss of $9 trillion to the global economy.
“How do you do one time restructuring on day one? Onetime restructuring will involve several discussions with the lending institutions and the borrower. Lender has to understand the borrower's needs and the borrower will have to assess what is going to happen in future with an uncertain demand,” Bindra said in response to a question by ETV Bharat in the Banking and Business Dialogue hosted by Mumbai based firm EPS India.
Bindra, who has previously worked with Bank of America, UBS and Standard Chartered Bank, says it is extremely difficult to predict what kind of business will be there once the lockdown measures are completely lifted.
“How does a restaurant owner wakes up in September and says that I used to do 100 tables a day pre-Covid, now I will do 80 or 60 or I will do 30,” Bindra said while explaining the difficulty of business owners in projecting any future business that is essential for a loan restructuring.
“So how do you do restructuring,” he asked.
What is restructuring of a loan account?
If a loan account, be it a business loan such as a working capital loan taken by a company or a home loan taken by an individual borrower, turns bad which means the borrower is not able to repay the monthly installment on time then banks can restructure the loan.
Under the restructuring of a loan, the tenure of the loan can be extended beyond the earlier agreement, amount of EMI or monthly installment can be changed and the terms and conditions of the loan can also be amended to allow the borrower to repay the loan when the situation comes back to normalcy.
Moratorium extension is easier than restructuring
Bindra says extension of moratorium is much easier to execute but there is a clear risk of some people taking advantage of the situation in not paying their dues.
He, however, cautions that such borrowers will create more challenges for themselves because they are going to have higher interest burden.
Moratorium: Home loan versus business loans
Jaspal Bindra also rejects the apprehensions that home loan borrowers will be in difficult situations if the moratorium is not extended beyond August.
“The reality that we notice in the market is that of the lending businesses, the lowest moratorium is taken in home loans,” he said.
Bindra also points out that lenders will be more comfortable with extension of moratorium on home loans despite low level of utilisation by home loan borrowers.
“I think most lenders to home loan borrowers will be more comfortable because it is a secured asset and there is the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) at the end of it. I think there is more comfort,” explained the banker.
(Article by Krishnanand Tripathi)
