RBI's new restructuring package for small borrowers: Will it work?

The new restructuring package for small borrowers has little chance of taking off

“Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day,” Mark Twain once said. The witticism means getting the biggest, most important task, done first. Will the Reserve Bank of India’s (RBI’s) new restructuring package for small borrowers turn out to be a case of bankers developing a taste for the amphibious creatures?
 
Rajkiran Rai G, chairman of the Indian Banks’ Association and managing director and chief executive officer (CEO) of the Union Bank of India, believes that “the main purpose of this restructuring package is to provide relief to both small businesses and individuals. It also helps lenders to conserve asset quality, as restructuring will be given to those affected only owing to Covid-19.” But the devil is in the details.
 
On implementing the restructuring plan, lenders will have to set aside a provision of 10 per cent of the residual debt of the borrower. And the histories of borrowers will also get tagged as “restructured” in credit bureaus. This, in turn, will affect their ability to raise fresh debt. Simply put, lenders are hard-pressed to set aside capital on restructuring small borrowers’ accounts, even as those who avail of it run reputational risks.
 
It is therefore understandable that a new word is being bandied about now as a solution to break the logjam ahead — “standstill”. Its genesis: At a recent interaction between CEOs of banks and RBI Governor Shaktikanta Das, “moratorium” as an idea was shot down as “off the table.” And therefore, the euphemism “standstill”. Is it practical to take it off the table?
 
Devil in the details
 
Unlike last year’s relief package, which had a moratorium, this time around it’s up to lenders to decide which borrowers are eligible for it — and, that too, only if they were classified as standard accounts at the end of FY21.
 
Now, look at the numbers. While at the account level these may be small, they add up to a huge amount at the systemic level. The central bank’s data on sectoral deployment of credit show banks’ exposure to MSMEs at Rs 5.19 trillion. The exposure to non-banking financial companies (NBFCs) is Rs 9.45 trillion, and many of these, in turn, on-lend to MSMEs. And, microfinance institutions (MFIs) have given out Rs 2.30 trillion (they also depend on bank funding).
 
“The restructuring is to be offered based on banks’ assessment that, but for the pandemic, the account was fine. But, what we need to look out for is how long this second wave will continue,” says Ramaswamy Meyyappan, chief risk officer at IndusInd Bank.
 
Alok Misra, CEO and director of Microfinance Institutions Network, notes that “you have to look at the issue in the spirit of the policy intent, rather than over technicalities at the granular level. Otherwise, it is very difficult to operationalise these guidelines.”
 
He adds: “The relief will also put pressure on the capital positions of the regulated entities. This has to go side by side with forbearance on provisioning, especially for entities under Ind-AS (Indian Accounting Standard).” Ind-AS is of particular import for NBFCs and MFIs, as it brings into play provisioning based on “expected loss” which eats up more capital for these entities.
 
In short, the entire ecosystem around lending to small borrowers — MSME, MFIs, or retail — can trip up.
 
Build-up of a tsunami?
 
Tucked away in the RBI’s Financial Stability Report of January 2021 is the observation: “The continuing adverse impact on MSMEs due to lack of cash flows, low demand, lack of manpower and capital could lead to prolonged stress in the sector and large-scale permanent closure of units with associated implications for employment.”
 
Rai points out that “the main problem small units face is delayed payments from large firms in the supply chain. Under the Covid-19 regulatory package, MSMEs are getting extra time up to 180 days to repay banks.”

 
Yet, litigation can’t be ruled out, as in several cases of MSME or MFI stress, it’s the larger firms — both state-run and large private ones — that are at fault. In the current economic climate, they can act as saviours and provide liquidity to MSMEs paying their dues on time; and TReDS (Trade Receivables Discounting System) is a key platform for this.
 
According to Ketan Gaikwad, managing director and CEO of the Receivables Exchange of India, when it comes to procurement, state-run enterprises rely on existing channels with legacy solutions. “TReDS enforces payment discipline, and puts an end to free credit enjoyed by both state-run entities and corporates at the expense of MSMEs. Numerous MSMEs have reached out to us complaining about the highhandedness and use of old ways to settle MSME dues.” What this implies is that there is no all-round liquidity at the firm level.
 
Until April this year, collections were good — for some lenders, near pre-Covid levels. It has changed since, and this time around, rural India will be hurt. Nor will collections bounce back anytime soon. There is the possibility of a third wave, too. “Capital is quoting at a high premium. Restructuring accounts only kicks the can down the round,” says a senior banker who did not want to go on record.
 
He adds, ominously: “I get the sense that the better-capitalised banks will take a hit upfront and classify an account as a non-performing asset, rather than offer a restructuring.” What he leaves unsaid is that this will also restrict the ability of lenders to hand out more loans.