Restructuring is a bad idea: Last thing we need now is systemic risk

For banks, restructuring is nothing but kicking the can down the road or postponing the pain while window-dressing the balance sheet.

Bankers are justified in asking the Reserve Bank of India (RBI) not to extend the three-month moratorium for loan repayments, but they should not be clamouring for a one-time restructuring of stressed assets. Deepak Parekh is spot on when he says even able customers are playing truant; that is not hard to believe. The moratorium should never have been allowed in the first place, and Parekh’s request should be heeded. He is absolutely right when he says lenders, especially many of the smaller NBFCs, will be in big trouble, and the last thing we need now is systemic risk. Forbearance on classifying stressed assets is also a patently bad idea. If RBI Governor Shaktikanta Das allows one, he would pretty much undo all the good work done by the asset quality review initiated in late 2015, when the impaired assets of banks were between 9-22%; having more or less cleaned up the books, it would be unwise to dirty them again.

Moratoriam and loan recasts make it easy for banks to camouflage balance sheets, but hard for investors to assess their quality. And, it is unfair to the existing shareholders. Remember the CDR—the corporate debt restructuring—mechanism? It allowed banks to give customers lenient repayments terms—lower interest rates and longer tenures; at the end of it, a handful out of thousands of companies were able to make it while banks wrote off thousands of crores. In January 2013, a CDR was approved for Suzlon, with interest rates lowered by 3% and a ten-year door-to-door back-ended repayment plan; eight years down the line, banks have just approved another recast. In hindsight, they should have just cut their losses and moved on. In December 2011, a CDR was approved for Bharti Shipyard for an amount of Rs 2,850 crore, which even today is a lot of money. Again, a waste of precious resources, time and energy. Between 2010-11 and 2012-13, the quantum of loans restructured by banks through the CDR cell jumped eleven-fold to Rs 76,479, taking the total of non-performing assets (NPAs) and restructured loans to an estimated 10% of bank credit.

The point is restructuring doesn’t help chasten borrowers. All the CDRs achieved was that promoters had control over their companies for a longer period and enjoyed the perks and privileges associated with that; the concessions didn’t really spur too many of them to revive the business. On the contrary, they created a moral hazard and vitiated the environment. The SEBs are a great example of how borrowers misuse bailouts. Also, restructuring works better when the economy is on an upswing; at a time when the GDP is estimated to contract by anywhere between 6% and 9%, and not expected to recover meaningfully thereafter for at least two years, it is unlikely to help.

For banks, restructuring is nothing but kicking the can down the road or postponing the pain while window-dressing the balance sheet. The moratorium may have been forced on them, but they cannot ask for a restructuring as compensation. To be sure, some companies will bounce back, but many won’t. In today’s environment, analysts are not going to differentiate between a restructured loan and an NPA.

Given most lenders are out in the market looking for capital, they would be looking to spruce up their balance sheets. There are reports of some of them evergreening loans to enable customers to come out of the moratorium book. Others are reportedly bending the rules, so they don’t need to classify borrowers as those that have opted for a deferred repayment.

It is certainly surprising the moratorium portfolio has shrunk so quickly. RBI’s Financial Stability Report pegged the total moratorium book for the sector at 50% of loans in end-April, 68% for PSUs, 31% for private sector banks and 49% for NBFCs. However, for a couple of top private lenders, the share of the book is down sharply to single digits. If the numbers are down in the second round, because banks have been stricter, that is good news. But if bankers are back to their old ways, sweeping the dust under the carpet, that is disappointing.

Investors will see through that, which is why the government needs to do two things. First of all, it needs to quickly capitalise the banks—through bonds which are floated off-balance-sheet—so that bankers needn’t approach the capital markets just yet. These are extraordinary times, so the government needn’t worry that its off-balance-sheet borrowings are increasing. The capital will allow banks to support those businesses where the chances of a recovery are reasonably good without worrying about their balance sheets. The government also needs to revoke the ban on the IBC; that will allow bankers to find investors and buyers for businesses that are stressed and where the promoter is unable to contribute equity capital. In the absence of the IBC, banks are hamstrung, especially when dealing with errant promoters. Right now, given the state of the economy and the fact that 65% of MSMEs have opted to defer repayments, it wouldn’t be far-fetched to assume that about 25% of the moratorium book will slip. But, banks’ balance sheets need to be beefed up if they are to save businesses that have a fighting chance of survival. For that, the government must assure them capital protection.