Better alternatives to loan moratorium – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/better-alternatives-to-loan-moratorium/articleshow/83409051.cmsSynopsis

The concern is real, and it is imperative to address the distress in India’s small business universe that prompts such calls. But moratorium is not the solution; it can actually make matters worse.

Clamour for a fresh moratorium on bank loans is gaining strength. The concern is real, and it is imperative to address the distress in India’s small business universe that prompts such calls. But moratorium is not the solution; it can actually make matters worse. It would add to the stress in the banking system, without bringing relief to companies. Borrowers will face large, accumulated interest burdens when the moratorium ends. We need pragmatic alternatives. Converting a portion of the outstanding loan and interest into equity is one option. This would lower the debt servicing burden on the borrower. Additionally, troubled small companies could be given equity support, say, from the fund of funds the government had promised. When companies turn around, the companies can buy back the equity or the equity could be sold in the secondary market.

Is it right to impose large haircuts on banks? The alternative is to lose the entire loan, as the borrower’s business collapses. Banks do take haircuts, which range anywhere between 60% and 90%, in the resolution of bad loans under the bankruptcy code. The logic being that the resolution of bad loans with steep haircuts is better than no resolution at all. When economic growth revives and businesses thrive again, the equity can be sold back to the companies, and the banks can recoup the money they lost in the haircuts, as well. Rightly, RBI has allowed banks to restructure loans up to Rs 25 crore advanced to small businesses, and provided another ₹16,000 crore to Sidbi to meet the short- and medium-term credit requirements of MSMEs. But the sector needs non-debt capital (equity) for revival.

The government’s fund of funds was supposed to mobilise over Rs 50,000 crore to invest in MSMEs. It should swiftly provide equity and regain it once the companies have stabilised. Orders from a recovering economy will help these companies stabilise and start making profits. Buying equity stakes in MSMEs will also help formalise the sector and enable these businesses to access credit at lower rates.

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