Money & Banking

End of loan holiday threatens pain, defaults for small businesses

Bloomberg September 24 | Updated on September 24, 2020 Published on September 24, 2020

Pedestrians walk along a near-empty street near Crawford Market in Mumbai,   -  Bloomberg

Bankruptcies, job losses and bad loans set to increase

Small businesses in India, already struggling amid the pandemic, are now having to repay mounting debt after a loan holiday ended last month.

The Reserve Bank of India gave borrowers a six-month freeze on their loan repayments, which ended on August 31, with about a third of the country’s $1.8-trillion outstanding loans being deferred under the program. Businesses still trying to cope with a collapse in demand must now figure out how to pay back their loans or face closure.

Also read: Why private banks’ average lending rate on new loans has gone up

Pedestrians walk along a near-empty street near Crawford Market in Mumbai, June 2020.That’s a dilemma Regi Philip is dealing with. He owns a travel agency in Mumbai, which has had no business since April when the nation went into lockdown. He got a temporary reprieve from his bank, helping him save ₹45 lakh a month in debt repayments. He’s worried about how he’s going to resume those payments, given his travel business hasn’t recovered yet and he still has salaries and other overheads to pay.

“The Reserve Bank should ask banks to extend the moratorium,” said Philip, managing director of Cosmos Agencies LLP. “Else, I may have to resort to cut capital expenditure and staff retrenchment.”

Some relief to borrowers

The central bank has provided some relief to borrowers by allowing banks to extend the moratorium and restructure loans, but the process isn’t automatic. Lenders can grant extensions of as long as two years, and have until the end of the year to pick which loans to recast and until June 2021 to get it done.

Prime Minister Narendra Modi’s government has also set up a panel to assess waiving interest on loans frozen through August 31, which amounts to as much as ₹2 lakh crore.

But for many small businesses, which make up about 30 per cent of the economy, the relief won’t be enough. About 17.5 million shops, representing a quarter of small businesses, are on the verge of shutting down because of a lack of financial support from the government, according to the Confederation of All India Traders.

“The next level of stress for the economy is likely to emerge,” said Kunal Kundu, an economist with Societe Generale GSC Pvt. in Bengaluru. “Many of those organisations that barely managed to stay afloat thanks to the moratorium offered will inevitably go bankrupt, reducing levels of employment and aggregate demand.”

The economy’s 23.9 per cent contraction last quarter was the worst on record and the most of all the major economies tracked by Bloomberg. Consumption, which makes up about 60 per cent of gross domestic product, took a severe knock after millions of Indians lost their jobs during the lockdown. The recovery has been slow, and a surge in virus cases has led many economists to downgrade their growth forecasts even more.

Withhold payments

Banks are against extending the loan payment freeze as they see it as a strain on their finances and an opportunity for borrowers — who have the capacity to repay — to withhold payments.

About 75 per cent of the businesses that opted for the moratorium were sub-investment grade, according to an analysis of 2,300 companies by Crisil Ltd., the local unit of S&P Global Ratings. In sectors such as gems and jewellery, hotels and automobile dealers, every fifth company applied for the moratorium, it said.

“We are staring at a scenario of a potential collapse of our business if we don’t get any reprieve from the government,” said Ashokan Puthenpurackal, chief executive officer of Anntech Offshore Engineering Pvt. in Mumbai. “We are completely blank about the future for the simple reason that business is yet to get momentum.”

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Published on September 24, 2020
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