(COVID Diaries 3)
Prompt regulatory announcements for lifting the sagging spirit of the economy are being intermediated through banks. Some aspects need deliberation – addressing liquidity vs solvency of borrowers, adding more-blue to the blue blooded and operational challenges in complying with these measures.
Whilst liquidity issues of borrowers have been adequately addressed, the borrowers and banks together are awaiting reforms to address the solvency of the former. Each passing day is adding to the mounting losses of the borrowers.
Recall one such restructuring scheme introduced by the regulator some years back – 5/25. There may be case for reintroduction of the same – its features include retention of standard classification of borrowers and flexibility to give long tenor loans. Amongst several such schemes announced in the past, 5/25 was relatively effective. It is difficult to fathom, why the reluctance is introducing such measures as a short window of hope? To avoid misuse or regulatory arbitrage, the scheme may be restricted to the lowest investment grade customers of banks as of March 2020. Hence, the arbitrage in the target segment can be regulated.
Offering 90-day moratoriums on multiple occasions is making the system vulnerable to operational mishaps. The Loan Management Systems are being iterated over and over on a single loan viz., moratorium on a moratorium, interest accumulated for 90 days twice whilst revenues recognition remains constant, multiple shifting of repayment dates and interest payment dates and creating funded interest term loans among others. Now, are all these modifications talking to the loan and security documents, which are registered with the statutory authorities. Given this, extending moratoriums may become another disincentive for banks, in addition to imposition of 10% provision on this portfolio in the interim (provisions can be reversed at a future date is the accounts perform satisfactorily). It would be interesting to see how auditors would view this in their annual audits.
Regulatory tools for achieving the objectives should be in the form of modification of IRAC norms and capital relief, rather than providing modifying contractual and commercial terms of lenders and borrowers in the form of moratoriums. One must keep in mind that multiple alterations in loan and security documents can lead to ambiguities in legal interpretations in the future. There is room for extending NPA classification norm to 180 days, introducing standard restructuring and provision relief for a short period of time. This can be considered as a short window.
A mini asset boom seems to be brewing with the announcement of increase in Single Borrower Limit (SBL). Banks would be ears to ears with this modification and will burn the midnight oil to get their SBL limits revised by the boards. Quarterly, probably annual asset budgets of banks would be achieved through disbursements to top customers. AA and AAA rated customers would get additional leverage ! However, with asset targets getting met in single loan disbursements to a handful of customers, there could be pressure on NIMs if MSME customers do not get their due share of timely disbursements. Increase in SBL will lead to higher concentrations, but improve the overall rating mix of portfolios.
Delicate balance needs to be maintained by all stakeholders. With rating downgrades across the spectrum becoming imminent, capital of banks would get consumed much faster. Hope, capital markets become conduce for fund raising.
Sumit is a seasoned Banker with more than 24 years of experience in Credit and Risk functions. He has worked with leading banks including HDFC Bank, Yes Bank, Deutsche and last served as a Chief Credit Officer with Federal Bank.