Debt and disaster

We are no strangers to disasters. No disaster is like its predecessors. And they manage us instead of us managing them.

But even in a country used to disasters of one kind or the other, Chennai’s catastrophic rains are unique. The damage to infrastructure and industry can run into billions of rupees. But the estimate for the insurance sector’s outflow towards the rescue was initially put at a measly ₹500 crore. This figure may have excluded assets insured in the financial sector. Several industries, including the export-oriented auto components industry, the leather industry and MSMEs alone have assets worth around ₹2 lakh crore in and around Chennai.

As of March 2015, there were 1,327 commercial bank branches in Chennai alone, holding advances of nearly ₹1 lakh crore.

The real estate loss is no less. Several houses are rubble. Even as roads, drainage, sewerage systems, drinking water, are brought to normalcy, and health and hygiene issues tackled, the issue of rebuilding will have to be addressed, for which the financial sector has to gear up faster than others.

By now, banks should have come to a rough assessment of the losses their clients suffered; the loss their own infrastructure suffered; the extent to which insurance claims can be recovered; and the resurrection of ATMs and POS machines at retail outlets.

RBI guidelines on rescheduling and restructuring of loans issued in July 2015 take care of the agricultural credit and micro credit affected by such natural calamities. But one important guideline is that the State Level Bankers’ Committee may constitute special task forces to assess the damage to their own assets and the assets financed by the banks, and declassify all the NPAs to facilitate restructuring.

With regard to the MSME sector the guidelines are not comprehensive. In addition, the SLBC should take a call on the conditions under which certain loans could be written off where any restructuring may not be of help to the unit. It may have to also take a call on enlarging the discretionary powers of local managers and the online reporting system for such decisions so that expeditious clearance of rehabilitation proposals are set in motion.

Several MSMEs have manifold responsibilities of rehabilitating their workers along with rebuilding their assets, as well as restructuring their financial assets.

Term loans for repairs to and renovation of factory buildings/sheds and machinery as also for replacement of damaged parts, and working capital for purchase of raw materials and stores will need to be provided urgently. The banks may have to waive all the interest and instalment dues.

Where the raw materials or finished goods have been washed away or damaged, banks’ security for working capital will naturally be eroded and the working capital account (cash credit or loan) will be out of order. In such cases, banks can convert drawings in excess of the value of security into a fixed-term loan and also provide further working capital to the borrower on liberal terms. Banks should not insist on any collateral security for rehabilitating the unit. The gestation period should be at least six months.

Depending on the damage and time needed for restarting production and sales, term loan instalments will have to be rescheduled, keeping in view the income generating capacity of the unit. Shortfall in margins will have to be condoned or waived and borrower should be allowed time to build up margin gradually from future cash generation.

In respect of advances guaranteed by the CGTMSE (credit guarantee fund trust for micro and small enterprises), banks should claim from the guarantee organisation the eligible amount of advance outstanding with recourse to covering future advances to the unit as if it is a fresh loan. The existing guidelines of the CGTMSE do not contain any provisions for such cover. Hence there is need for taking an urgent call on this.

The rate of interest on all the restructured loans should be 2 per cent below the existing lending rate of all advances. Recall what Kautilya said in Arthasastra : “Calamities due to acts of god are: fire, floods, diseases, epidemics and famine.” (8.4.1) “Whenever danger threatens, the King shall protect all those afflicted like a father (protects his children) and shall organise continuous prayers and oblations”.(4.3.42)

The collective thinking of SLBC should be out-of-the-box; it should work with the State government in bringing back Chennai to normalcy.

The writer is an economist and a risk management specialist

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