The RBI has been both sensitive and fast in dealing with the Covid crisis. It has constituted a committee of eminent persons under KV Kamath for recommendations on dealing with stressed assets, with a tight and functional deadline. Laudable as this is, one requires a non-discriminatory and non-discretionary yet speedy mechanism at this time to tackle the ongoing crisis.
The committee will no doubt come up with a valid and justifiable set of criteria for one-time restructuring of loans. This may include industry-wise criteria, client health-specific criteria, bank client-history-specific criteria, and so on. Whatever be the recommendations of the committee, its guidelines would involve application thereof, which would call for discretion of bank officials at different levels, including at the board level, in certain major cases.
This process involves time — to get revised projections from clients and justify such restructuring — to write up the proposal and present it before the sanctioning committees at the levels concerned, documenting such approvals, new amendment agreements, etc., involving a great deal of effort and lead times.
There is a lot of inertia induced by the recent spate of financial frauds and the way they have been dealt with in full public view. The trouble with ‘exemplary’ punishments, as seen in some cases, is that they affect the psyche of the honest (who make the near total majority) much more than those who game the system. The net effect is a definite slowdown in the system and risk aversion.
Our public sector systems depend too heavily on the top for decision-making. Most such functionaries are often close to retirement and prone to risk aversion, except where possibly the decision-making is collective as at the board or committee level. If the choice is between protecting the borrower and their own pensions, they can’t be faulted for preferring their self-interest.
A faster approach to debt restructuring may have been as follows:
All principal repayments due on loans could have been extended by a year and all dates (beyond March 2020) in all existing agreements (as of March 2020) could have been deemed to be read as one year more than that mentioned in the repayment schedule. For example if the repayment was to be in 2020,2021, 2022, they should be mandated to read as 2021, 2022 and 2023 respectively.
All interest payments due during the year that cannot be serviced by clients could be accumulated and converted into a loan for three years with a small increment of 1 per cent over the present documented rate, which clients may choose not to avail.
These points could be legislated so amendments to individual loan documents are made unnecessary. That will leave no discretion and hence neither would rent seking be possible nor would risk aversion be necessary. This approach would be the fastest to implement. Such a systemic boldness has been demonstrated by Brazil thrice during the last century, but in a different matter — cancelled the last three digits in all outstanding currencies overnight (for example, 10,000 Brazilian real was to be read as 10 real).
Banks would be rid of NPA and provisioning worries. Their cash flows for relending may be diminished, but they are already stuck anyway, for both lack of inflows and of credit-worthy clients to lend to.
This would still leave foreign loans. But banks are quick on such decisions and generally a lot less discouraged by personal fear psychosis.
Firms that have been profitable even after the Covid impact may not have to suffer any credit downgrades if the rating agencies sensibly factor in the obligations met with the scenario after Covid subsides. Such firms may face the dilemma of whether to seek a re-scheduling or not for fear of stigma by rating agencies and lending banks in future. This approach would save them from such blushes.
Those who have declared losses in the last four months would gain by the interest moratorium and may have to only deal with residual concerns.
If the government could also sanction changes in accounting standards to capitalise all interest and forex losses and may be even Covid losses (even if the firms are not funded by banks), it would help prevent many firms from breaching ratio covenants in most cases. Ratio covenants play a big role these days in the decisions to lend, rating, and determination of rates.
The writer is author of Making Growth Happen in India