The inability of promoters to bring in fresh equity could significantly hamper loan restructuring of companies hit by a sharp fall in revenues due to the extended lockdown.
While the government and the Reserve Bank of India (RBI) have announced several measures to aid liquidity flow into stressed companies, two bankers said on condition of anonymity that the increasingly lopsided debt-equity ratio of many companies could be a major hurdle for any potential loan recast, which could threaten the survival of many companies.
In the past, many Indian promoters have heavily relied on lenders, including banks and credit funds, to raise equity for their business. However, lenders say that in the current economic scenario, promoter funding is likely to become scarce.
“What the government has done in terms of the small business loans will revive credit flow to that sector. However, credit to other sectors will take more time to pick up as banks will not be able to lend more without additional securities," said the first banker quoted above.
He said several such loans are already stressed and even if they are restructured, it would need promoters to bring in some equity. “I might have to eventually restructure the loan but have to take a call on promoter equity at a later stage," he said, adding banks may seek additional promoter guarantees.
The government recently announced that it will guarantee ₹3 trillion of loans to small businesses facing severe stress during the prolonged lockdown that began 25 March. While the economy is gradually reopening, these businesses are yet to find their feet. Risk-averse lenders seem upbeat about the collateral-free loans.
Saswata Guha, director of financial institutions at Fitch Ratings in India, said these are extraordinary times and several companies are in the thick of this ongoing distress. “If you look at the financial position of banks, there is very limited incentive for them to actually extend loans to structurally weak entities where a promoter may not be willing to bring in fresh equity, and where banks bear both credit and capital risk. Banks can still choose to give fresh loans even to such companies in the hope of the situation improving, but the flipside is that it increases both future balance sheet risks and loss potential," said Guha.
Meanwhile, the absence of any budgeted capital in FY21 will limit banks’ ability to lend aggressively. The second banker cited above said RBI has allowed banks to relax working capital margins and these can be reinstated to their original levels by March 2021.
“Although there is limited demand for term loans, there could be a surge after the lockdown. However, banks have to make some adjustments to lending structures and be more accommodative if promoters are unable to bring in contribution," said the second banker, adding banks were in stress even in the September quarter and the pandemic has made it worse in terms of asset quality.
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