MSMEs send SOS for Loan Recast

Due to the COVID19 pandemic, thousands of small- and medium-sized companies in India have missed loan payments and are staring at a prolonged period of distress while the larger ones have held their ground. Micro, small and medium enterprises (MSMEs) make up the overwhelming majority of companies that are seeking easier loan repayment terms from banks under the Reserve Bank of India’s special restructuring window for those affected by the coronavirus pandemic. Central bank committee was formed to recommend debt recast parameters. In its report, the five-member panel led by former ICICI Bank chief executive KV Kamath identified five financial parameters to gauge the health of sectors facing difficulties.

These include total outside liabilities to adjusted tangible networth, total debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), debt service coverage ratio (DSCR), current ratio and average debt service coverage ratio (ADSCR). The committee submitted its report to RBI on 4 September, and its recommendations were broadly accepted.

Following the committee’s report, RBI had said that banks must ensure that restructured loans meet specific financial parameters by March 2022, allowing a one-time debt recast of large corporate loans and personal advances, along with debt of micro, small and medium borrowers, provided they were classified as standard as on March 31. The central bank has offered the restructuring window till March 2021 as a relief from stress caused by one of the strictest lockdowns in the world. The central bank also said that while 1 March 2020 is the reference date, the actual debt considered for resolution will be the amount outstanding as on the date of invocation. (The date of invocation refers to the date when the borrower and the lender agree on the resolution plan and RBI has set a deadline of 31 December.) Lenders have up to 180 days to implement a corporate debt recast and 90 days for retail loans from the date of invocation. Later RBI clarified that loans that were in default for more than 30 days as on 1 March but where the overdue amount was subsequently repaid will not be eligible for debt recast under the new debt recast window.

They released a set of frequently asked questions along with its responses clarifying RBI’s stand of a number of issues. RBI has set 1 March as a reference date for deciding the eligibility of borrowers under the new resolution framework. After laying out broad eligibility norms, RBI let individual lenders decide on which accounts to approve.

Highlights

• Debt recasts typically involve extending the tenure of a loan and may include a higher interest pay out over the extended period. In some cases, lenders also allow moratoriums to stressed borrowers for a defined period, after which the repayment schedule resumes.
• Over 4 lakh MSME accounts are expected to go in for restructuring under this framework but banks are still not actually talking about the numbers of requests, with most Bankers saying cases are still being identified.
• Many MSME borrowers, reported that there is a situation in private banks where the rate of rejection of recast proposals is much higher than at public sector lenders. In several cases OD PSBs, where banks have agreed to allow debt recast, requests for a moratorium was rejected, It takes a lot of persuasion even to get a recast approved and banks should allow a moratorium as part of the scheme.
• Banks, on their part, maintain that they are in the process of identifying stressed borrowers, and identifying genuine cases is a tedious and time-consuming process. Lenders ask customers to prove that they had either lost orders or had their incomes substantially reduced by the pandemic.
• Since the assessment is in the hands of individual banks, there is a lack of clarity of what level of income loss makes one eligible. Bankers have often been reported saying that corporate debt recasts may not be significant, given they have already deleveraged significantly.
• Even though banks have to do 15% provisioning for declaring NPAs, compared to 10% in the debt restructuring scheme, they find the former a better option in many cases. Even though banks have to provide only 10% for recasting a loan under debt restructuring scheme, the reversal of provisioning will take a lot of time.
• Current debt restructuring circular of the regulator has a problem, as it is delaying the reversal of the provisioning for the banks as compared to normal NPA restructuring.

Chairman SBI, Dinesh Kumar Khara, had earlier said that the bank has received requests for restructuring of  Rs. 6,495 crore loans so far. Furthermore, the lender is expecting additional restructuring requests of Rs. 13,000 crore by December, 2020. As per estimates, debt restructuring will be less than 1% of SBI’s total advances of Rs. 23.85 lakh crore. Similarly, PNB and Union Bank have halved their targets for restructuring to less than 3% of the loan book.

• If we go by the commentary of management of banks in the second quarter (Q2) results, 5-8 percent restructuring may look slightly on the higher side, but definitely 3-5 percent cannot be ruled out, however, a clearer picture will emerge by December-January.
• The entire recast process is closely guarded by Banks and MSMEs have no mechanism to monitor / appeal, neither does RBI or the Fin Min Supervise / monitor the process.

Suggestions to relieve the Stress and Revive MSMEs

a.    Online Application & Monitoring System for Restructuring Applications

A portal for restructuring applications maybe created by the Ministry or DFS using existing platforms including Stand-up India which can be modified and all applications must go through this portal with a unique reference number generated for each restructuring application. All restructuring applications with a list of these reference numbers, must be forwarded to respective banks at the CEO/MD level on a daily basis, for consideration, diligence and approval. The respective bank maybe allowed 10 working days to approve / reject / suggest amends in the restructuring proposal and a status can be may be updated on the site as per the situation of the case by the bank on a daily basis.

A monitoring agency / body / officers from the Ministry of Finance may oversee daily applications and pull up banks on the restructuring applications. This will clearly give numbers and status of how many accounts have been restructured and in case of delay reminders may be sent to banks by the Fin Min.

b.    One-time settlement (OTS) route – for recovery and revival of MSMEs under 250 Crores of turnover adjudged non performing accounts.

As per RBI data, in 2018-19, scheduled commercial banks’ recoveries via four modes – Insolvency & Bankruptcy Code; Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfeasi) Act; Debt Recovery Tribunals and Lok Adalats – jumped to ₹1,26,085 crore in FY19 against ₹40,352 crore in the preceding years.

In the backdrop of the government promulgating an ordinance, whereby creditors cannot file insolvency resolution applications for defaults occurring during the 6 month period starting March 25 in view of the adverse impact of Covid-19 and the minimum threshold to initiate insolvency proceedings which has been upped 100 times to ₹1 crore, the government can step up focus on compromise recoveries and offering a breather to MSMEs via an OTS waving all penal accrued / compounded interest and offering repayment terms over a period of 12-24 months with minimal interest on the compromise settlement amount.

OTS involves compromise settlement of non-performing loans (NPLs) between a bank and its borrowers as per the board-approved policy of the former. This settlement entails the lender/ creditor taking a hair-cut on the outstanding loan amount. In the case of accounts, which have been in the NPL category for more than 3 to 4 years and where almost full provisioning has happened, banks are in a position to take a little more hair-cut than they normally would. In the case of an account that has become NPL in March 2020, provisioning would have been minimal. So, a creditor will take less hair-cut, especially when securities are available.

On a net present value (NPV) basis, whatever amount Banks realise via OTS, will be better than recoveries via the National Company Law Tribunal, Debt Recovery Tribunal or court cases, where the recovery happens after 3 or 4 years. So, if banks start getting the money now (via OTS), they can re-deploy.