The government has recently made an announcement to suspend proceedings against defaulters under the Insolvency Resolution and Bankruptcy Code for up to one year. This is generally viewed upon as a big relief for Corona affected corporate loan defaulters. But then what is there in store for the Bankers whose balance sheets are already stressed out due to a heavy backlog of non-performing assets (NPAs)?
India has been under lock-down for over a couple of months now. The households and businesses are not functioning as vibrantly they used to be before the advent of this disease. Unemployment has increased to alarming proportions and several businesses have closed down. To add to the woes of the businesses, there has been almost a mass exodus of laborers from urban areas / industrial towns to the rural areas.
The businesses that are functioning despite all odds have had to scale down operations because their labor and other staff either cannot reach to the work places or have moved out to their home towns. Besides restrictions on movement may have disrupted supply chains. And at the top of it they may have to reckon with lack of effective demand because either the points of sales are closed or the people may have become thrifty (see article) due to job uncertainty in the pandemic times. Covid19 has pushed the economy down into a vicious circle of unemployment (see article).
It is something more than a mere two- or even four-balance sheet problem
Challenges are bigger for corporate borrowers. They have a statutory obligation to pay the interest and the loan installments as per the terms of the issue to their lenders, be it Banks or the Non-Banking Finance Companies (NBFCs). Further, many Non-Banking Finance Companies have resorted to heavy borrowing from the Banks to scale up their operations. Recently there was a lot of discussion on the four balance sheet problem (see article) being faced by the Indian economy. A typical representation of the four balance sheet problem is given in the following figure:
Covid19 has further aggravated the issue. It is not the two or four intertwined balance sheets problem anymore. In my opinion, it is a “multiple balance-sheet problem”.
With the whole economy under lock-down, the MSME sector is hit hard. The MSME sector in India not only contributes substantially to the national exchequer but also contributes to providing employment to millions of Indians. This sector largely depends on the NBFCs and the Banks for its short term working capital requirements.
The multiple balance-sheet problem is therefore a serious issue and needs to be tackled tactically so as to prevent further transmission of financial stress to the rest of the economy.
Amendments in IBC will give a breather to the constrained corporate borrowers
The Central Government has given huge amount of economic stimulus (around Rs. 20 Lakh crore) to support businesses in a desperate attempt to bring the halted economy back into motion. The Reserve Bank of India has also been taking a number of measures to inject liquidity into the financial system in order to support economic activities in the pandemic times.
Though these jumbo macro initiatives are going to ease out liquidity conditions for the businesses in general, the recent announcements by the Finance Minister about relaxations in the IBC Code 2016 proceedings can be viewed upon as a big relief for the corporate borrowers in particular.
The Central Government has already raised the threshold amount of default for the purposes of application of the Insolvency Resolution and Liquidation provisions for Corporate Persons as specified under section 4 of the Insolvency and Bankruptcy Code, 2016, from Rs one lakh (Rupees 0.1million) to Rs. 1 crore (Rupees 10 million). This is likely to give a breather to the covid19 fighter/survivor corporate borrowers.
Secondly, in a recent notification, it has been announced that no fresh proceedings shall be triggered due to covid19 related defaults for a year from the date of notification. This move is likely to help the corporate borrowers to sail through this difficult phase and attain normalcy as business environment improves over a period of time.
A straight ban on fresh IBC filings has been followed by a suitable change in the RBI restructuring and provisioning norms to deal with the stressed assets. The Banks have been given relaxation under the Prudential Framework which required the lending institutions to hold an additional provision of 20 per cent in the case of large accounts under default if a resolution plan has not been implemented within 210 days from the date of such default.
As per a recent notification the RBI has allowed the lending institutions to exclude the entire moratorium/deferment period from March 1, 2020 to August 31, 2020 from the calculation of 30-day Review Period or 180-day Resolution Period, if the Review/Resolution Period had not expired as on March 1, 2020.
This, in addition to several other measures taken by the RBI to ease out financial stress in the economy will work well for both the corporate borrowers and the lending institutions and they will be better prepared to deal with the intense COVID-19 disruptions.
To conclude, it is important to take such bold decisions to address the multiple Balance-sheets problems in this critical phase. The RBI’s initiative aiming at easing out the repayment pressures and improving access to working capital by mitigating the burden of debt servicing, is a welcome move and will strengthen the RBI’s pursuits to prevent the transmission of financial stress to the real economy, ensuring the continuity of viable businesses and households.