Predictable and Avoidable

A MSME borrower approached me yesterday and sought my advices to survive the present crisis as his main supplies of raw material had been discontinued since January and by the time he was able to arrange for alternate supplies and ship his finished goods, the entire world had got into a lock down and his exports were stuck at the docks. Another small borrower who had actually received increased enquiries from countries which normally imported from China, lamented that while he had been able to ship material in the nick of the time before lockdown but with skeletal staff available in bank branches had been unable to get his bills discounted and was going to default. I am sure that there are hundreds of such cases which are facing problems on account of logistics, inventory, receivable, cash flows and banking and yet struggling to meet their obligations towards staff, taxes, rent, electricity, and other liabilities.

RBI has announced three months of moratorium for their interest and instalments falling due in March, April and May whereafter these would have to be paid for working capital deferrals in the month of June and for term loans, backending the tenor. Media has been advising retail borrowers, meantime, that such backending may result in their paying eventually 9 to 12 instalments more than the three being deferred, perhaps, they are not factoring in the reduction of interest on their entire liabilities which the banks ought to pass on simultaneously honouring transmission expectations of the RBI who have reduced the repo by 75 bp.

Be that as it may, there is considerable confusion amongst small and medium borrowers who do not believe that the crisis would be over by May and normalcy would return in June 2020, as expected by RBI. If that is the normal expectation and one does not see any reason for the regulators to believe otherwise, unless they have some deeper insights which should then be shared with their stakeholders, then its only the credibility of the regulators which would be adversely impacted by such piecemeal measures. Why not announce a six months moratorium ab initio, why have people guessing that RBI would evaluate and then extend, if required? This only adds to the uncertainty and leads to more unexpected responses, like preserving extra liquidity, which would make return to normalcy that much more delayed.

It is now more or less a fact that most businesses have been impacted adversely by COVID 19 lockdown and, therefore, expecting banks to extend Morats only if they have established that such businesses have actually been so impacted, somehow, in such times, when greater expedition is expected, reinforces our Bureaupathy. This could have been avoided and handled with greater trust placed on both the banker and the borrower. There would have been a few exceptions but with digital tracking enablement, such elements would have been weeded out sooner than later.

Restructuring is not a bad thing. In these volatile times, when govts and regulators are unable to project for the next three years or even one year for that matter, expecting small and medium businesses to provide projections which would form the basis of any credit sanction by banks, may be unrealistic. Who could have predicted COVID 19? This is the time when we could have flattened the curve for recovery of our MSME businesses by allowing restructuring over a medium term instead of only a moratorium for just three months. The banks could have asked to provide upfront for expected credit losses and in the absence of any historical data, directed to provide 15% for such restructured accounts, without the stigma of their asset classification being downgraded. This would have enabled them to enjoy credit from their suppliers too and recover faster. Instead, we may see, a prolonged recovery, increase in the level of NPAs and reduced unemployment for longer than we would have hoped for. It’s time that we empathized with the practical situation faced by the community and businesses with, perhaps, greater understanding and magnanimity.

Remember that the Great Depression which started with the stock market crash in 1929, landed with business and bank failures three years down the line. History does not repeat itself, we do actually.

We shall overcome. Jai Hind.