oppn parties Banks Must Move Fast To Provide Relief

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oppn parties
Banks Must Move Fast To Provide Relief

By Ashwini Agarwal
First publised on 2020-09-09 15:27:18

Restructuring of loans is not always successful because banks either cannot or do not properly identify companies that would weather the storm and come out stronger if they are provided relief at times of stress. The problem becomes extreme when a situation like the pandemic throws the whole economy out of gear. Right now, the situation in India is precarious because hundreds of companies were already stressed due to the downturn in the economy before the pandemic struck. In this situation, the Kamath committee report on restructuring of corporate loans provides the banks a ready reckoner to identify eligible companies by laying down norms, identifying 26 sectors that need help immediately and providing a framework for the banks to follow in providing relief. But the report shows is likely to help banks more than the stressed companies.

One says this because the report lays down conditions that will first weed out companies that were already stressed before the pandemic. While this is good in one way, it overlooks the fact that these companies did not get a chance for revival due to the pandemic. Hence, a sector-wise mechanism should have been worked out to identify stressed companies that have a chance of revival, however slim. Leaving them to die a slow death is not wise. Then, by keeping the threshold too high, the committee has, perforce, excluded several companies, unfortunately in sectors that are severely stressed, mainly due to the lockdown, such as aviation and travel and tourism. Further, the indicators prescribed, like debt and EBITDA will make it impossible for companies with high debt to take advantage of the restructuring.

Another factor which needs to be kept in mind is that since the banks will not immediately restructure the loans (given the speed at which the banking sector works, it might take anywhere between three to six months for the modalities to be worked out after extensive one-to-one negotiations and submission of box loads of documents), the companies must be provided a gestation period - a further period of moratorium - before they start making the payments. The RBI must instruct the banks not to brand any such loan as NPA till a final decision is taken of the restructuring. The government must also examine the possibility of extending support to stressed companies through equity funding as the companies will not have to service that part and the government might make a profit by selling the shares at a premium once the economy revives and the companies start doing well. A special fund can be created for the purpose.