‘Moratorium extension will lead to debt pile-up’

The Indian Banks’ Association (IBA) has asked the Reserve Bank of India (RBI) to allow one-time restructuring of loans across the board, but at the discretion of bankers. In a telephonic interview, IBA Chief Executive Officer SUNIL MEHTA discusses with

Somesh Jha the demerits of extending the loan moratorium window and argues why it is the right time for the regulator to allow banks to restructure loans, but with adequate caution. Edited excerpts:

Stress levels are ambiguous due to the moratorium. Credit outlook is bleak without a vaccine.

Credit growth is correlated with economic activity. Credit growth is gaining traction through the emergency credit line facility. No one is clear about the stress levels — how long the moratorium will continue, what will be the new regulatory framework. We have to wait and watch to see how the situation unfolds in the aviation tourism, travel, and hotel industries. The IBA has recommended to the RBI to permit onetime restructuring across the board. We anticipate normalcy to bounce back after the vaccine is ready by December. Respite (in terms of the moratorium on repayment of loans) is available till August. If the situation is handled well, stress can be diminished.

Wouldn’t one-time restructuring across the board lead to a moral hazard as was experienced in the past?

Most bankers have learnt lessons the hard way. Banks did attempt restructuring in 2012-13, with varying degrees of success. The balance sheets of

banks were impacted and the problem was resolved through capital infusion and the introduction of the Insolvency and Bankruptcy Code. The nonperforming asset (NPA) levels were declining in pre-covid days. The capital adequacy ratio was strengthened. Now, every bank can come out with a boardapproved policy to decide on the loans to be restructured.

They can be selective, depending upon need and merit. Some sectors will require deeper restructuring; others may require rescheduling. The RBI has permitted banks to reassess working capital requirements and reduce margins wherever required. For term loans, restructuring or rescheduling would work. There should be certain qualifying parameters since every bank has a different profile. I feel bankers have learnt their lessons and the chances of misusing the restructuring window will be fewer.

Have you suggested ways to restructure?

We have recommended one-time restructuring across the board, but this should not be a tool for deferment of loan instalment. It should be only applicable to viable units. The parameters can be designed by the boards of banks which

“We have recommended one-time restructuring across the board, but this should not be a tool for deferment of loan instalment. It should be only applicable to viable units”

have nominees from the RBI, too. It can be done on a case-by-case basis.

The salaried class taking home loans who are employed with the government don’t need restructuring. Even within the housing loan, depending upon the portfolio, banks can take a call. The differentiation will prevent misuse.

Are you in favour of further extension of the moratorium on loan repayment?

You cannot keep extending the moratorium. Otherwise the deferred debt will become so high that it will not be possible to recover in the short term. A moratorium for six months is a minor rescheduling of existing loans that can work out. Any further extension, it will become unmanageable. Sectors such as aviation, which saw zero cash flow during the past few months and had to incur cost in terms of salaries of aircraft lease rent, have to repay their working capital loans. Recovery will take place in three-four years and to that extent, restructuring is the only option. Unlike rescheduling, the nature of loans may undergo a change, along with extension of timeline for repayment in restructuring. For instance, a part of the working capital can be converted into term loans.

Are you suggesting both rescheduling and restructuring after the moratorium?

Yes, it can be decided on a case-by-case basis. Look at the moratorium window itself. Only 15 per cent of large corporates have opted for the moratorium, 85 per cent have avoided taking the route. In the retail sector, only 20-30 per cent have gone for the moratorium. Overall, only 30 per cent account holders have chosen the moratorium across all segments.

The government is not too keen on funding the IBA’S bad bank proposal.

Since there is global economic meltdown, you may not find good investors for stressed assets right now. If the government infuses capital and owns a national-level asset restructuring company (ARC), banks can transfer their assets at the book value to the ARC, which will help in aggregation of debt. Ten banks taking simultaneous decisions for a single loan account becomes a difficult task for resolution of bad debt. Further, the asset management company will be partly run by bankers and private investors, so that it is managed professionally. Assets acquired by the ARC will be managed and can be sold when the market is in the right shape. The NPA of banks will improve and it will become easier for them to raise capital.

But it doesn’t seem to find favour with the government.

We are quantifying the data and will tell them that the moment you give capital worth ~10,500 crore to the ARC, the requirement to give capital to banks will come down more than that. Ultimately stressed assets carry 150 per cent risk weight, which means the capital requirement is much more. The moment stressed assets come out of the books, the capital requirement will reduce and there will be a multiplier effect. We will continue to convince the government.

What are the IBA’S reservations on the RBI’S discussion paper on governance reforms?

There are three sets of issues for public sector banks, private banks, and foreign banks, which have a different governing structure. We have come up with a different set of suggestions for them. The RBI is interacting with us.

What are the broad contours?

The RBI’S discussion paper says the chief risk officer of the bank will report to the risk committee of the board and the chief compliance officer is supposed to report to the audit committee of the board and will not be accountable to either the executive directors or the managing director (MD) and the chief executive officer (CEO). Are we absolving the MD and CEO of the responsibility of risk and compliance? Why would the MDS ensure compliance, if the two officers do not report to them? The committees are headed by independent directors. Are we going to give them executive roles? Risk is a day-to-day function. There is risk in every credit and recovery decision, which is an operational function and not a board function. This is a western model where the MDS are not responsible. They only act as a business mobilising unit, as most credit decisions are taken by the corporate office. To bring in that model, India’s governance structure will have to be restructured and will not be successful in the Indian context. We are also not in favour of a maximum 10-year tenure for promoter CEOS and directors.