The Government of India, together with the Reserve Bank of India (RBI), had done a commendable job in alleviating the pain of the borrower community during and after the nationwide lockdown imposed to counter the COVID-19 pandemic. Thanks to their timely actions, a nascent recovery was visible in a few sectors during the last two quarters of FY21. Indeed, international prognostications for India's recovery for FY22 turned overwhelmingly positive in the last quarter of FY21. However, with the emergence of the second wave of the pandemic, which seems to be more severe and widespread than the first one, economic recovery now seems uncertain again.
In the last pandemic, certain sectors showed early and visible stress, but the effects were eventually felt all across the spectrum of economic activity. Loan restructuring was advised for targeted sectors. However, since the second wave has arrived before the full recovery could take wings, many borrowers remain stressed. And the current wave is very likely to increase the number of stressed accounts. A full-fledged recovery is likely to take a much longer time.
Broad-based loan restructuring window
Keeping in mind the current scenario - the sharp and wide spread of the pandemic, and the ongoing challenges, it would be prudent on part of the RBI to come up with a simple notification allowing every stressed entity - which was not an NPA as on 29 February 2020 - to approach the lender(s) and seek a one-time restructuring of the loan account. This window should ideally be kept open till March 2022, keeping in mind the uncertain trajectory of the second wave of the pandemic.
Assessment of loan servicing ability based on underlying factors
The banks, NBFCs and other lenders should be encouraged to make their revised assessment of the borrowers' loan-servicing ability based on the cash flows (present and future), the value of the assets and collaterals, and other factors, and work out, in consultation with the borrower, a restructuring plan without classifying the account as a non-performing asset (NPA).
Retaining standard asset classification for duration of restructuring window
Retaining the 'standard asset' classification is very crucial because the moment a borrower is tagged as a defaulter, all formal avenues of resource mobilization get closed, virtually ending its chances of a revival. Drawing a COVID analogy, it is equivalent to shifting a patient straight into a ventilator the moment his test comes positive. In reality, it may be a very mild case which can be cured with simple medication and proper isolation and rest for the patient. Similarly, a one-time restructuring can do wonders in normalizing most stressed accounts.
Aligning provisioning norms
Under the present RBI guidelines, during the restructuring phase, a project loan can retain its 'standard asset' classification for specified periods, provided the lender(s) make a provisioning of 0.4% to 2% depending on the nature of the loan (infra or non-infra). As these are extraordinary times, RBI may suitably increase the provisioning amount (say up to 4%) but ensure that adequate time is allowed to improve the chances of success of the restructuring exercise. To make up for this increased provisioning, banks and NBFCs may postpone any dividend distribution for a specified period.
Keeping in mind these extraordinary times, providing the option for a one-time restructuring to all the stressed borrowers would be a fair step and can avoid unnecessary hardship for both debtors and creditors, paving the way for an orderly and practical resolution. The priority, right now, should be to safeguard all entities against the ravages of the second wave and to preserve employment and the spirit of entrepreneurship against the odds.
- Sunil Kanoria i Is the Vice Chairman, Srei Infrastructure Finance Limited