A faster one time resolution plan
This appeared in Businessline today. https://www.thehindubusinessline.com/opinion/a-quicker-way-to-do-one-time-loan-resolution/article32489800.ece
RBI has been both sensitive and fast in dealing with Covid crisis. It has constituted a committee of eminent persons under KV Kamath with a tight and functional deadline. Laudable as it is, one requires a non-discriminatory and non-discretionary yet speedy mechanism at this time to tackle the crisis.
The committee will no doubt come up with a valid and justifiable set of criteria for onetime restructuring. This may have some industry wise criteria, some client-health specific criteria, some bank-client history specific criteria. Whatever be the recommendations of the committee, its guidelines would involve application thereof which would call for discretion by bank officials at different levels including at Board level in major cases.
This process involves time – to get revised projections from clients and justify such restructuring – to write up the proposal and present before the sanctioning committees at whatever levels, documenting such approvals, new amendment agreements, etc. involving great lot of efforts and lead times.
There is a great deal of inertia induced by the recent spate of financial frauds discovered and the way it has been dealt with in full public view. The trouble with such ‘exemplary’ punishments is it affects the psyche of the honest (who make the near total majority) much more than the people who game the system. The net effect is a definite slowdown in systems and risk aversion.
Our public sector systems depend too heavily on the top for decision making. Most such functionaries are closer to retirement and prone to risk aversion, except where possibly the decision making is collective like at Board or committee level. Between protecting his borrower and their own pensions, they can’t be faulted for preferring their self-interest.
A faster approach may have been as follows:
- All principal re-payments due on loans could have been slid down by a year and all dates (beyond Mar 2020) in all existing agreements (as of March 2020) could have been deemed to read as one more year than mentioned in the repayment schedule. For example if the repayment was to be in 2020,2021, 2022, they should be mandated to read as 2021, 2022 and 2023 respectively.
- All interest payments due during the year, if the clients are not able to service could be accumulated and converted into a loan for 3 years with a small increment of 1% over the present documented rate, which clients may choose not to avail.
These could be legislated so amendments to individual loan documents made unnecessary. That will leave no discretion and hence neither bribe seeking/offering would be possible nor would risk aversion be necessary. This would be the fastest to implement. Such a systemic boldness has been demonstrated by Brazil thrice during the last century but in a different matter when they cancelled the last 3 digits in all their outstanding currencies overnight (like all 10,000 Reals were to be read as 10 Reals from next day morning).
Banks would be rid of NPA and provisioning worries. Their cash flow for relending may be diminished but they are stuck anyway for both lack of inflow and not many credit worthy clients to lend.
It would still leave foreign loans. But the foreign banks are quick on such decisions and generally lot less cowed down by personal fear psychosis.
Firms which have been profitable even after Covid impact may not have to suffer any credit downgrades if the Credit Rating agencies sensibly factor in the match the obligations with the scenario after Covid subsides. Such firms may face the dilemma whether to seek re-scheduling or not for fear of stigma by rating agencies and lending banks in future. It would save them such blushes.
Those who have declared losses in the last 4 months would gain by interest moratorium and may have to deal with residual concerns.
If the Government could also sanction changes in Accounting Standards to capitalize all interest, forex losses and may be even Covid losses (even if not funded by banks), it would help in preventing many firms from breaching ratio covenants in most cases. Ratio covenants play a heavy role these days in decisions to lend, rating, and determination of rates.