Banking after Moratorium: Three key Monitorables

With the moratorium of loans behind us, all eyes are now on restructuring of advances. One column in the excel sheets of analysts is blank until the formal announcement. The moment restructuring quantum is announced by banks, there would be a flurry of research reports, each trying to grab the eye-balls. 

There are three other items which have not yet caught the attention of the analysts. These events would unfold on April 1, 2021. Banks, borrowers, auditors and regulators will have to deal with these and would mark this day in their calendars for reviews.

First, the regulatory nudge to reduce of working capital margin from 25% to 10% of net current assets for computing working capital eligibility comes to an end on March 31, 2021 viz., banks have to revert to higher promoter margin of 25% from borrowers.

Second, the impact of inventory write-downs on P & L and drawing power would be known post final audits.

Third, the interest deferred for the moratorium period have been converted into term loans  (FITLs) till March 31, 2021. Let’s evaluate the impact !

In one of the early announcements to help the borrowers tide over the pandemic, the regulator asked the banks to provide higher working capital by reducing promoter margin requirements. While there are no prescriptive regulations around the margin requirements, the regulator has nudged the banks to consider this as one of the options to help the borrowers. This effectively means, the borrowers have got an adhoc limit of 15% of net current assets from banks till March 2021. The margin effectively ensures the borrowers financial contribution towards funding the current assets. In times of trouble and devaluation of current assets, the margin acts as a cushion.

1^st April would be an acid test for banks as well as the borrowers. What does this mean? When the promoter margin for working capital reverts back to 25% from 10% of net current assets, the borrowers would have to repay the difference, which is the adhoc limit granted by banks. The question arises, where would the companies source this amount from – there has to either windfall gain from somewhere or promoters have to infuse equity. Both, have low probability.

Second, the impact of inventory write downs is still not visible.  While the sales have been muted for the first three months of this financial year, there are bound to be inventory write downs on account of obsolete and perishable inventory or inventory being sold at a discount. The inventory is valued at lower of cost or market value for working capital eligibility. The inventory is yet not marked down in the drawing power computation and is inflating the working capital eligibility. Due to limited audits conducted in the first half of the year by external auditors, this amount is yet not ascertainable. The impact would be known in Q1 and Q2 of FY2022 post full year audits. Some smart banks would start worrying about the same very soon and proactively commence stock audits to assess the impact of inventory write down on profitability and working capital power eligibility.

Reversion of margin requirement and inventory write down would deplete the working capital eligibility of the borrowers. Hence, have the potential impact of leaving the companies in overdrawn situation on cash credit limits.

Third, the regulator has allowed deferment of interest for the moratorium period till March 2021 viz., no interest was paid in the first half of the FY, while the entire deferred interest is payable during the period of October 2020 to March 2021. Therefore, the interest charge doubles during this period and there would be additional pressure on cashflows.

Incidentally, all these issues are coinciding during this period. Statutory and regulatory auditors must be waiting with bated breath for April 1, 2021.

This is where proactive banks and rating agencies should step in rather than wait for the events to unfold post April 2021 and have knee jerk reactions.  Banks who manage cashflows and CMS of customers would benefit, since they would collect monies at the source to recover their dues. Marginal banks and banks with weak risk management systems would suffer.

Some of these regulatory announcements would have far reaching implications. There are initial signs of recovery visible and hopefully economic recovery would result in windfall gains to overcome any shortfall in cashflows.