Why Restructuring Can Fail

The RBI says that enough freedom has been given to banks to determine restructuring norms, particularly for sectors like aviation, automobiles, road and wholesale trading, but that freedom does not seem to be visible at the ground level for the harried borrowers.

In the matter of restructuring of loans, utter confusion prevails, in the banking system, at present. The recommendations of the KV Kamath Committee, by way of financial parameters to be met by a borrower, to be eligible for restructuring are out and have been accepted by the RBI, but if you approach your bank with a plea for the restructuring of loans, you might be told that no such restructuring guidelines have yet been formulated by the bank. With the deadline for completing a loan restructuring being set as end December 2020, by the RBI, time is running out for the hapless borrowers to get their loans restructured. Banks too need to restructure loans to viable units, to prevent the immediate build-up of NPAs, if they fail to do so. While bankers estimate that about Rs.4 to 5 lac crores of bank loans will get restructured, seasoned experts expect it to be at least double of this figure.

While bankers say there is a little clarity on the matter at present, the RBI, on the other hand, says that enough leeway has been given to accommodate the impact of covid 19 while stipulating eligibility norms for the recasting of loans. The RBI says that enough freedom has been given to banks to determine restructuring norms, particularly for sectors like aviation, automobiles, road and wholesale trading, but that freedom does not seem to be visible at the ground level for the harried borrowers. The prime objective for any restructuring of loans is to support viable enterprises in these tough times and prevent their closures, which will otherwise have a cascading effect on jobs, growth and financial stability of the system. But if we look into the past track record of such restructuring by banks, it is indeed disappointing and these objectives were never really achieved, whether in the case of CDR, SDR, S4A, where the failure rate of restructured loans was ultimately very high. All that these schemes collectively did, was to postpone the recognition of the NPA by a few years and let the rot of bad loans fester in the banking system.

The financial parameters announced by the KV Kamath Committee, are meant to determine those entities which are viable and to restructure their loans, to ensure their survival/revival. But just as there cannot be uniform terms for loans to borrowers under a ‘one size fits all’ approach, similarly there cannot be a uniform/standardised approach for restructuring loans, and here are the reasons due to which, like under the past restructuring schemes that failed, this one too could, such that a few years down the line the restructured loans will land in the growing NPA basket of banks.

1. The business challenges, operations and cash flows of each borrower are unique. Loans will thus need a tailor-made restructuring, instead of adopting an unviable, one size fits all approach. The banks will need to provide such flexibility in their restructuring schemes, to ensure that the exercise is realistic and succeeds in its objectives. A generic, tick in the box approach will only mar the chances of a successful restructuring of bank loans.
2. A key parameter to decide the viability, resumption of demand and cashflows of borrowers is to estimate/project the end of covid pandemic and India’s return to a normal economy. Not only is that uncertain at the moment, but more so with the end December deadline set by the RBI, which is approaching fast, there is not enough time to study and project the pandemic end, in such dynamic times. Any unrealistic assumption to project the start of a normal economy post covid will render the restructuring impractical and unviable.
3. Like in the past, if banks recklessly restructure loans, to postpone recognition of NPAs, then the entire restructuring program of the RBI is doomed to fail and there will be a colossal surge in bad loans down the line, which will again destabilise the banking/financial system.
4. The best of restructuring will fail if there is no tangible and sustainable revival of the economy at the earliest possible. What economic revival of demand does, the restructuring cannot and hence while the banks may do their bit in the best possible manner, the success thereof will ultimately depend on the overall revival of the economy.
5. The short timeline of end December to complete restructuring of loans prevents a meaningful/realistic assessment of each case and also does not give enough time to borrowers to bring in additional equity, to meet the requirements of financial parameters, such as debt/equity ratios.

It is imperative to restructure loans of viable units to support their revival and prevent closures and job losses, but if the policy execution is not compatible with the ground realities in the economy, then like many other government initiatives, it may fail to deliver the expected results.