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The many shades of RBI’s loan moratorium

  • The facility has been a lifesaver for many borrowers while spurring consolidation for others

The moratorium on debt facilities being offered by banks to eligible borrowers at the behest of the Reserve Bank of India (RBI) has had varied impact so far.

When covid-19 began infecting the world, the Indian economy was already reeling under the pressure of moderating demand. The subsequent lockdowns, disruptions across value chains, and demand shock only made matters worse for most Indian companies.

It was to cover the resultant cash flow inadequacies that RBI announced a slew of measures, including a moratorium on repayment of debt by all eligible borrowers. The moratorium window was two legged—first from 1 March to 31 May, and then extended till 31 August.

The response has been good, with as many as 2,300 out of Crisil’s total rated universe of about 8,000 corporates availing the opportunity. The compulsion, though, has tended to differ, depending on the degree of impact of the pandemic on individual companies and their ratings, sectors and sizes.

Here are the key takeaways from the analysis:

Sub-investment grade companies are more vulnerable: Of the 2,300 corporates, three-fourths have sub-investment grade ratings (rated BB+ or lower by Crisil), leaving only a fourth in investment grade.

The sub-investment grade companies, which otherwise have steady business models, grapple with leveraged balance sheets and stretched liquidity. Already struggling due to muted economic conditions, these were the worst impacted by the pandemic-led lockdowns and accentuated demand pressures. With business operations curtailed severely, the cash flows almost dried up for most of these entities, which typically have few funding avenues beyond bank lines. Indeed, the average bank limit utilisation for these players stands at over 90%, leaving very little cushion to absorb such cash-flow shortfalls.

For these players, therefore, the moratorium has been the veritable oxygen.

Even corporates rated in the investment grade (BBB- or higher) have availed of the moratorium, though in significantly lesser proportion. These companies generally have stronger balance sheets, adequate liquidity profile, and more headroom to borrow, and also cushion on their bank limit utilisation rates.

These players availed of the moratorium to build cushion for any unforeseen exigencies amid the extended lockdown and uncertainty around the pandemic’s trajectory.

Highly impacted sectors are more in need of moratorium: A sector’s resilience to the pandemic is assessed by its ability to bounce back to normalcy. This depends directly on the nature of its products (essential/non-essential), demand elasticity, strength of balance sheet in terms of leverage and liquidity, and the extent of government or regulatory support; and indirectly on labour availability, logistic issues, local bureaucratic and authorities’ requirements, etc.

Accordingly, highly impacted sectors such as gems and jewellery, hotels, auto components, automobile dealers, power (power utilities, independent power producers and energy traders), packaging, and capital goods and components saw every fifth Crisil-rated company availing of moratorium.

Low-impacted sectors such as pharmaceuticals, fast-moving consumer goods, chemicals, agriculture, dairy, and secondary steel, on the other hand, saw a very low proportion (only one in 10) applying for moratorium.

Size of operations matters too: With size comes the wherewithal to absorb shocks and unprecedented variabilities, and there could not have been a better teacher than the pandemic to drive home this message.

The number of companies availing the moratorium in the mid-sized corporate segment ( 300-1,500 crore turnover) was more than thrice that of their large peers (turnover of 1,500 crore and above).

Mid-sized players forced to avail of moratorium typically have little cushion available on the profitability margin front, limited ability to control costs, and relatively lower headroom in their balance sheets.

Their bigger counterparts, however, generally have more headroom in terms of margins to absorb cost pressures. Likewise, bigger balance sheets offer more financial flexibility.

In the milieu, what to look out for: The road to recovery is unlikely to be smooth. It could well be two or three quarters more before demand picks up, operations normalise and cash flows stabilise for most corporates.

Even as the moratorium draws to a close on 31 August, RBI has introduced a one-time debt restructuring plan to support cash-strapped companies. Banks will be the final decision makers.

Apart from badly hit low-resilience sectors, a sizeable chunk of players who faced cash-flow disruptions in the first quarter of this fiscal year, as well as companies in the project phase that might not have any other cash-flow source, would be ideal candidates to opt for restructuring of their bank borrowings.

Taking timely recourse to this facility can help companies manage their cash flows which, in turn, will provide support to their credit profiles.

Meanwhile, developments on the waiver of interest on deferred payments charged during the moratorium period will be interesting to watch. Should the Supreme Court rule in favour of a waiver, it remains to be seen who would fund the resultant losses for banks. Wider guidance and clarity on this is awaited.

The author is senior director, Crisil Ratings

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