Banks, debtors get time to put house in order2 min read . Updated: 07 Sep 2020, 11:17 PM IST
The Kamath panel on restructuring of loans gave its report to the RBI on Monday. With the pandemic disrupting cash flows, RBI and the banks have an onerous task on their hand to keep the system stable. Mint explores the issue in detail.
The Kamath committee on restructuring of loans gave its report to the Reserve Bank of India on Monday. With the pandemic disrupting cash flows, RBI and the banks have an onerous task on their hand to keep the system stable. Mint explores the issue in detail.
How is India facing a cash flow problem?
The covid pandemic resulted in lockdowns being imposed across the country which restricted economic activity across 60-65% of sectors. This effectively meant that limited productive activity or sale of goods or service took place in these sectors which impacted the revenues generated. In contrast, on the expenditure side, companies continued to incur costs in the form of rents, salaries, interest on borrowings and other fixed expenditure. Therefore, while there was no cash-flow coming in, companies had to keep up with their expenditure commitments creating a cash-flow problem for them.
What steps did govt take to address issues?
Given the slowdown in economic activity, and contraction in incomes, the government did take several measures to address the looming cash-flow problem. For starters, it deferred the last date for filing of tax returns and announced a slew of regulatory forbearance measures. The Reserve Bank of India even allowed banks to offer a moratorium on loan repayments, wherein they granted borrowers time to repay loans. Gradually, the percentage of firms availing the moratorium came down and RBI did not extend the facility beyond 31 August. But it allowed for a one-time restructuring of loans.
What’s the point of RBI’s loan restructuring?
Restructuring of loans is a process that enables banks a re-look into its loan contracts and to modify the terms of the loan. This happens in instances where the borrower is facing severe financial stress and is done to save the borrower from defaulting. This also prevents banks from provisioning for potential losses on their balance sheet which affects their profits.
Will restructuring help prevent bad loans?
By changing the terms of loan contracts such as the interest rate, repayment period, number of instalments, additional loans or repayable amount, banks will provide businesses with a chance to repair their balance-sheets. This will help firms recover from the financial stress and prevent a rise in NPAs over the next few months. However, the pace and extent of revival will be critical in repairing corporate sector balance sheets which is key to prevent another round of huge NPAs and, an increase in provisioning by banks.
What about long term health of the sector?
This depends on healthy economic growth and restoration of balance sheets of the private and financial sector. While swift recovery is key, another important aspect would be to ensure that the window of regulatory concessions is used wisely. Banks have, in the past, used the option of restructuring to prevent NPA classification with the intention of setting aside a little money for provisioning. The new rules will determine whether we go back to the same habit or work towards a clean-up of sector.
Karan Bhasin is a policy researcher.