The Government of India, along with the Reserve Bank of India (RBI), had done a commendable job in alleviating the pain of the borrower community all over and after the nationwide lockdown imposed to counter the COVID-19 pandemic. Thanks to their well actions, a nascent recovery was once visible in a couple of sectors all over the final two quarters of FY21. Indeed, international prognostications for India’s recovery for FY22 turned overwhelmingly positive in the final quarter of FY21. Then again, with the emergence of the second one wave of the pandemic, which appears to be more severe and widespread than the first one, economic recovery now seems uncertain again.
In the final pandemic, sure sectors showed early and visible stress, but the effects were eventually felt all across the spectrum of economic activity. Loan restructuring was once advised for targeted sectors. Then again, since the second one wave has arrived before the full recovery could take wings, many borrowers remain stressed. And the current wave is very likely to increase the number of stressed accounts. A full-fledged recovery is likely to take a much longer time.
Broad-based loan restructuring window
Keeping in brain the current scenario–the sharp and wide spread of the pandemic, and the ongoing challenges–it would be prudent on a part of the RBI to get a hold of a simple notification allowing each and every stressed entity, which was once not an NPA as on 29 February 2020, to approach the lender(s) and seek a one-time restructuring of the loan account. This window must ideally be kept open till March 2022, keeping in brain the uncertain trajectory of the second one wave of the pandemic.
Assessment of loan servicing ability based on underlying factors
The banks, NBFCs and other lenders must be encouraged to make their revised assessment of the borrowers’ loan-servicing ability based on the cash flows (present and future), the value of the assets and collaterals, and other factors, and work out, in consultation with the borrower, a restructuring plan without classifying the account as a non-performing asset (NPA).
Retaining standard asset classification for duration of restructuring window
Retaining the ‘standard asset’ classification is very a very powerful because the moment a borrower is tagged as a defaulter, all formal avenues of resource mobilization get closed, practically ending its chances of a revival. Drawing a COVID analogy, it is equivalent to shifting a patient straight into a ventilator the moment his test comes positive. In fact, it can be a very gentle case which may also be cured with simple medication and proper isolation and rest for the patient. In a similar way, a one-time restructuring can do wonders in normalizing most stressed accounts.
Aligning provisioning norms
Under the present RBI guidelines, all over the restructuring phase, a project loan can keep its ‘standard asset’ classification for specified periods, given the lender(s) make a provisioning of 0.4% to 2% depending on the nature of the loan (infra or non-infra). As these are atypical times, RBI may suitably increase the provisioning amount (say up to 4%) but make sure that adequate time is allowed to support the chances of success of the restructuring exercise. To make up for this increased provisioning, banks and NBFCs may postpone any dividend distribution for a specified period.
Keeping in brain these atypical times, providing the option for a one-time restructuring to the entire stressed borrowers would be a reasonable step and can keep away from unnecessary hardship for both debtors and creditors, paving the way for an orderly and practical resolution. The precedence, presently, must be to safeguard all entities against the ravages of the second one wave and to maintain employment and the spirit of entrepreneurship against the odds.
(Sunil Kanoria is vice chairman of Srei Infrastructure Finance Limited)
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