Synopsis–For the lenders, the financial statements will have to reflect and even take a judgment on the financial health of companies they have lent to. This is mainly because they will have to provide for this in the financial statements.
MUMBAI: Even as the government suspended the Insolvency and Bankruptcy Code (IBC) process for three more months amidst Covid pandemic, this is set to have an impact on the financial statements of the lenders and these companies.
For the lenders, the financial statements will have to reflect and even take a judgment on the financial health of companies they have lent to. This is mainly because they will have to provide for this in the financial statements.
For the companies on the other hand that are in a stress situation, the problem of “going concern” will be triggered. Going concern is essentially an accounting concept where the auditor has to certify that the company will survive for the next one year.
Industry trackers say that the extension of the IBC process means that neither the lenders nor the companies will have a clear idea on the future viability.
Fresh loans are hard to come by for large stressed corporates and medium and small enterprises that have utilised the moratorium, which is estimated to be as high as 40% of total corporate loans, as lenders look at them as vulnerable candidates who could become bad loans in a few quarters. In some cases lenders also roped in consultants to study the viability of some big businesses before signing off on the next tranche of loans.
Most of the accounts where lenders see vulnerability emerging are the MSME accounts where bad loans have been abnormally high. As per a report by TransUnion CIBIL, the bad loan ratio in the MSME segment stood 12.5% as of January 2020.
“There is a lot of uncertainty when it comes to asset quality so bankers feel it’s prudent to study cash reserves, cash monitoring and past track record before extending further loans,” said a senior official at a public sector bank on the condition of anonymity. “Largely the scrutiny is on those accounts which are showing signs of stress.”
While lenders say they are ready to face the stress, a little bit of prudence is the need of the hour. Issues are also emerging in companies which could have not been referred to IBC, but could have been had it not been for the government suspended insolvency proceedings against fresh defaulters for a year.
The impact may be more for the banks and the NBFCS. Many NBFCs are struggling to predict and manage credit risk amidst the pandemic, it has become imperative for them to have a strong risk management framework. Some of the factors that NBFCs may consider in risk management are assessment of creditworthiness of the borrower, mitigation of credit risk by reviewing value of collaterals on a regular basis and regular back-testing.
Auditors and company executives had told ET earlier that higher provisioning may be necessary as the Covid-19 pandemic-induced sharp slowdown would have increased difficulties for these businesses already hit by the ongoing slowdown. In many cases auditors have asked companies to provide up to 50% failing which they will be forced to
qualify the accounts.
NBFCs follow Indian Accounting Standards or Ind-As and will have to provide for all the potential bad loans even if it’s way above what the central bank has prescribed. Under Ind-AS, auditors are required to make a judgment call on each loan portfolio even if the borrower is not a defaulter, and decide how much has to be provisioned. Some industry leaders have even welcomed the move stating that it will be better for the industry long-term.
Share the joy of reading! Gift this story to your friends & peers with a personalized message. Gift Now