The second wave has hit small businesses hard; permit recast of loans of upto Rs 50 crore, while classiying the accounts as NPAs
Under the circumstances, there can be a case for allowing more restructuring of small- and mid-sized business units with exposures of upto Rs 50 crore.
Earlier this month, Reserve Bank of India (RBI) allowed banks to restructure loans of borrowers—individuals and MSMEs—with a maximum exposure of Rs 25 crore, provided their accounts were in order at the end of March. The regulator also allowed banks to extend any moratorium, offered as part of a restructuring for up to two years. The move was much-needed given the disruption to small businesses caused by the mini-lockdowns and curfews across the country. According to a report in The Times of India, banks have now indicated they may need to restructure more loans. That’s not surprising because the restrictions on movement have only increased during the second wave, hurting sectors such as retail trade, food and hospitality, travel, transport. The hit to the economy might not be as bad as it was this time last year but that’s little consolation given how growth contracted some 24% year-on-year in Q1FY21; even if the impact is not as bad, it is nonetheless a severe blow. Indeed, several economists expect the economy to contract in Q1FY22 and that in itself is an indication of how badly businesses are likely to have been hurt. High frequency indicators continue to be below par for a range of sectors and critically the services sector remains in distress.
Under the circumstances, there can be a case for allowing more restructuring of small- and mid-sized business units with exposures of upto Rs 50 crore. However, no recasts can be allowed without accompanying change in the classification of the account; if banks want to restructure debt, they must classify the account as a non-performing asset (NPA) and make the necessary capital provisions. Recasting an account without downgrading the asset quality cannot be an option. Banks should not hesitate to classify a recast loan as an NPA because, if their assessment of the outlook for the business is correct, the account would become a standard one a year or two down the line. Indeed, they owe it to their customers to offer them some relief in terms of repayments during this period of crisis. Even otherwise, banks have scarcely been lending; non-food loan growth at the end of March had dipped to its lowest levels in the last four years, at 4.9% y-o-y, whereas surplus liquidity is running at close to `6 lakh crore. One is not asking banks to throw good money after bad, and on no account should they be evergreening an exposure. But wherever possible they need to assist borrowers genuinely hit by the pandemic. Going by the asset quality, it would appear that banks—and NBFCs too—have been extremely careful while giving customers a moratorium on repayments that was permitted by the central bank last year; this time, there is no moratorium but they should continue to be cautious while restructuring loans. It is possible the economic environment will deteriorate further because the vaccination rollout has been very slow and there is no clarity yet on when a sizeable share of the population is likely to have been inoculated. Should banks hesitate to recast loans because of the need to make provisions, the central bank could reduce the quantum of provisioning; however, the accounts must be correctly classified as sub-standard. One could argue that such forbearance would dilute standards, but these are very difficult times. Unless small businesses are supported, it could result in high levels of joblessness.