Why even large industry needs a one-time loan recast

Even as the Centre and the RBI have announced a series of steps to provide easy credit to MSMEs and relief to vulnerable sections, they have so far not specifically addressed the crisis in sectors that have been more deeply and inexorably impacted by the pandemic than the rest. These include travel, hospitality and aviation. As large employment generators, they could do with a one-time credit restructuring deal. Large units in critical sectors, such as telecom and power, too, could do with some relief in the form of one-time loan restructuring. A helping hand to large industry, which has so far been offered generous repo rate cuts and would have to rely on monetary transmission to benefit from them, would help the MSMEs with which they have backward linkages. A restructuring of loans and their reclassification as standard assets for about a year, with a higher level of provisioning than the usual 15 per cent, is perhaps the way forward. This would clear the way for banks to lend, as the economy responds to the demand stimulus, leading to an increased demand for credit in FY22. The challenge here is to ensure that the mistakes of loan restructuring in the context of the 2008 crisis are not repeated — when ever-greening of loans and the suppression of NPAs culminated in the Asset Quality Review post 2015 and the uncovering of the bad loan mess. The need of the hour is to focus on economic recovery, without compromising on prudential checks and balances.

Banks will be able to assess their NPA status only after the moratorium on loan servicing ends on August 31. At present, the sum under moratorium is pegged at about 40 per cent of loans outstanding. It would be reasonable to expect the NPA level to be close to the 11.5 per cent level of March 2018 by the end of this fiscal. A relaxation, or indeed review, of the NPA norm to beyond 90 days should be considered while dealing with an unprecedented emergency. The classification of an asset as NPA leads to a focus on asset recovery rather than revival of the unit concerned. The RBI, the Finance Ministry and the IBC should be on the same page in these extraordinary times. Perhaps, a panel that oversees a credit-led transition out of the present situation can ensure clarity of policy and action.

Banks remain credit averse, despite the slew of measures to boost credit growth. While the demand for loans remains weak, it is also true that the fear of ‘vigilance’ remains. This is because the Finance Ministry’s assurances in this regard have not been adequately backed by written instructions. A system where bankers record loan applications and are obliged to process them within a reasonable time may help usher in a different incentive system. Either way, this is an inflexion point for the banking sector.