POUR WATER WHERE IT'S REALLY DROUGHT

The projection of a sharp surge in the ratio of gross non-performing assets (NPAs) to 12.5% by March 2021 in RBI’s Financial Stability Report released last month's projects is worth noting and it could even jump to 14.7% in the event of ‘severe stress’. This indicates a sharp fall in the net worth of borrowers, and of lending banks. Simultaneously it also signifies a crisis of liquidity for borrowers during the ongoing Covid-19 crisis. Apart from operating losses, they need higher liquidity for funding decelerated customer payments, loan repayments, contracted liabilities, and higher inventory and debtor levels. They need to meet the stiff conditions of their credit sanctions. Otherwise, they lose the capacity to utilize sanctioned credit. Such high NPAs also indicate a crisis for banks operating on a capital adequacy ratio of less than 15%. In this milieu, GoI needs to urgently come up with liberalized schemes for borrowers. In the absence of margin money availability, borrowers can’t utilize even sanctioned credit. For all borrowers, margin money should be reduced from 25% to 10% up to March 31, 2021, then changed to 17.5% and back to 25% as on March 31, 2022, and March 31, 2023, respectively. The credit losses incurred between March 1 and December 31, 2020, be converted into a special term loan repayable after four years, and not be counted for debt-equity ratio in this period. The holding period levels of inventory can be increased to four months, and debtors not received up to four months be considered as good security. These levels can be tapered down in the next two years. Such measures will recognize the practical reality of business today and permit borrowers to continue to enjoy the credit. Anyway, according to the category of the borrower, the general liberalization should be nuanced. They will lead to a better capital-output ratio by higher capacity utilization. Special schemes should be designed for borrowers grouped into

(1) companies with a good performance record.

(2) stressed assets but with a good record in other group companies.

(3) stressed assets but with no management record of good performance.

(4) special sectors like non-banking financial companies (NBFCs), real estate, tourism, and hotels.

(5) small and medium enterprises (SMEs) with a turnover above Rs 100 crore not covered under present SME schemes.

The revival of these companies will energize the SME sector. Stressed assets that do not have good management could be provided the options of selling out, merging with bigger companies, or loans being converted to capital and sold to asset reconstruction companies, or to open bidders. A clear announcement of a takeover credit scheme with longer repayment will be needed, as most bidders will already be stretched. There is a requirement of amendments in taxation laws to allow benefits for infrastructure industries to be available even in mergers. Unabsorbed losses should be amended to be carried forward in a takeover by the purchase of shares in unlisted companies. The banking sector needs urgent steps to achieve efficiency and recapitalization to recoup losses in value realized in the first stage. To put an end to the sufferings of business growth, GoI will have to be ready to conduct recapitalization itself as an alternative.