Money & Banking

Covid impact: Loan appraisal norms will undergo a change, say bankers

K Ram Kumar Mumbai | Updated on July 12, 2020 Published on July 12, 2020

For companies applying for new loans as well seeking a hike existing loan limits, banks will need to take new a new approach

The way banks appraise India Inc’s loan proposals could undergo a sea change as company balance sheets would have taken a severe beating in the last three months due to the disruption caused by the pandemic.

Banks are unlikely to depend only on business projections for FY21, which are based on FY20 balance sheet numbers, to take a call on new loan proposals or enhancing existing loan limits.

With the pandemic casting a shadow over the way forward for businesses, lenders will seek out the latest position relating to parameters such as the behaviour of the borrowers’ top suppliers and buyers, their ability to collect receivables, and solvency (ability to meet long-term debt and financial obligations), among others.

According to Rajkiran Rai G, Managing Director and CEO, Union Bank of India: “Whether it is (internal credit) rating or our balance-sheet analysis, we used go back to previous year’s balance-sheet and based on that we used to take a call.

“Now significant damage would have happened to the balance-sheets (of companies) in the last 3-4 months. So, credit appraisal is going to totally change.”

Reliance only on historical data suicidal

Rai underscored that given the current situation, going by historical data will be suicidal as banks may end up taking wrong decisions.

So, he felt that banks need to weigh the impact of the pandemic, look at companies’ current position — current assets (cash and its other assets that are expected to be converted into cash within a year), their ability to liquidate the stock they have, their ability to collect receivables, among others, and undertake a thorough sectoral analysis before taking further decisions on loans.

“We have to be very careful and again look at the solvency of every company before we take a decision. This is because even their solvency would have been seriously affected,” said the Union Bank chief.

Q1 ‘disappears’ from balance sheets

Chaitanya Gayatri Chintapalli, Executive Director, Bank of India, observed that the credit assessments for FY21, which were made before the March 2020 lockdown started, will definitely undergo a change.

He said because of the lockdown, Q1 (April-June 2020) has almost “disappeared” (in terms of sales) from the balance sheet of companies. And in the case of Q2 (July-September 2020), the picture is not clear.

“So, appraisal is totally undergoing a change. It is not a normal appraisal, where you have a specific turnover, which you project and you sanction new limits,” Chaitanya said.

Therefore, banks will have to be watchful about the developments in various sectors, how the supply chains are doing, capture the expenses despite non-production by companies, and look at their funding needs for surviving and moving forward.

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Published on July 12, 2020
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