Coronavirus impact: India Inc wants one-time restructuring of loan accounts

Companies may default on bank loans in the June quarter as they report zero sales and rising costs, prompting finance managers to ask the Reserve Bank of India to allow one-time restructuring of accounts without downgrading the account to non-performing assets (NPA) category.

“Due to the Covid-19 outbreak, all sectors are affected. While some are affected severely, others are less severe. But the financial blow remains severe for all. Hence, permitting restructuring only to some sectors will not solve the problem on hand,” said the head of finance of a large conglomerate asking not to be quoted. One-time restructuring of loans will help every company and prevent cost-cutting measures like layoffs, he said.

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“No company could envisage that its top line will be zero for over a month. Even after lifting the lockdown, sluggish demand will take its toll on the margins for a sufficiently long time,” he said. Mid-sized groups, which we are doing well just before the Corona outbreak, are already facing the crunch and are planning to cut salaries and delaying new hiring.

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Analysts have already predicted that due to the lockdown, India's economic loss will be close to $ 234.4 billion or 8.1% of GDP, assuming that India will remain under a partial lockdown at least until the end of May. This is largely due to higher-than-expected output losses in the agriculture, utilities, construction and wholesale and retail airline, travel and tourism and media sectors.

The finance heads said the RBI should defer interest and repayment at least for one year and to every company. Though the RBI has announced a moratorium of three months till May this year, CFOs say this is not enough – taking into account the zero sales for over 40 days.

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The banks should also provide 25 per cent of existing working capital limits as additional limits to the industry with a backstop by a special purpose vehicle (SPV) held by the government. “These additional limits are repayable in 24 months from the end of 12 months. Unless liquidity is provided to industry, the revival of the economy is difficult with credit-constrained industry,” said he.

Finance heads said lowering interest rates across the board for at least one year would benefit all companies. Though the RBI reduced the repo rate by 2.1 per cent in the past few months, the MCLR (Marginal Cost of Funds based Lending Rate) reduction is only 0.5 per cent. “The benefit of lowering of repo rate is not transmitted to the industry because the banks still link their lending rate to MCLR but not to repo rate while bank lending in retail linking to the repo. Therefore, there is some benefit to retail borrowers but not to industry,” said CFO of an infrastructure company.

The additional liquidity through targeted LTRO (Long Term Repo Operation) should not land up with PSUs and AAA-rated companies. There should be a mechanism to monitor lending of this LTRO money with sectoral allocation and to companies up to investment grade and not to only to Triple A-rated companies and to the public sector units. The credit growth in the last few weeks is negligible with only top-rated companies raising funds from banks to repay their older, higher-cost loans.