In India, truth is the first casualty of pandemic finance
Many borrowers are currently stuck in limbo, amid a central bank moratorium
The true financial cost of Covid-19 is something India would rather not acknowledge, let alone bear — at least not until the pandemic has played out.
That explains why the central bank on Thursday allowed a one-time restructuring of corporate and personal loans that have been under stress ever since Prime Minister Narendra Modi put the country under a severe lockdown in March.
Nationwide restrictions have given way to more localised containment. But with India becoming only the third country after the US and Brazil to zoom past the two million infections mark, it will be months before the authorities can shift the economy back into its pre-Covid gear.
The engine was sputtering then, too. Yet just to return to this low-speed economy, India will have to top up the capital destroyed by the coronavirus.
Like almost everywhere else, the ability of assets to earn returns in industries ranging from airlines, hotels and commercial real estate — from large firms to their small vendors — has been impaired. However, in India, truth is currently as scarce as capital. It’s in nobody’s interest to discover the extent of the money shortfall because the hole won’t be filled. The government doesn’t have the appetite for large-scale socialisation of private losses, lest the opposition accuse Modi of cronyism. Very few large Indian business groups have dry powder, and those that do would rather preserve it for now.
Global distressed asset specialists may be willing to take a large bite, but India’s bankruptcy court is shut to new cases for a year. Without the pressure of insolvency, it’s only the property and infrastructure players, whose backs were against the wall even pre-Covid, that may want to sell out to Western private equity and pension funds.
Many borrowers, particularly smaller companies, are currently in the limbo of a central bank moratorium on loan servicing. They will welcome the chance to end this suspended animation with a one-time restructuring. Those plans will be put in place by December and implemented by March, according to the Reserve Bank of India.
‘Sucking up bandwidth’
The lenders, who aren’t even giving an honest picture of delinquent advances, will now use tools like debt-equity swaps and two-year extensions of repayment periods to keep avoiding significant loan-loss provisions.
Most of these hurried recasts will probably follow standardised templates. That’s a worry in a country where even custommade breathers have tended to fail. But hopefully by the time the arrangements come unstuck, the economy will have stopped shrinking. That way, the banks will have some operating profit to absorb losses. If they were to come clean now, they would have to find much more than the record $10 billion-plus fund-raising currently in the works. The capital circle is just too hard to square.
Whether the loan relief succeeds or fails, one thing is certain: India’s $1.4 trillion credit machine will be in stall mode until next March as restructuring “sucks up bankers’ bandwidth”, says Nachiket Naik, head of corporate lending at Arka Fincap Ltd.