Some Ill-informed Notings

 

The about 2 weeks travel that I got to do recently, thanks to the son who lives in Phoenix, through Arizona, Central Texas, Southern Utah and Southern California, left me with many Impressions gained through watching, hearing and very little reading. Being too lazy to build stories around these Impressions, though eminently possible for a diligent story teller, say of the kind the wife is, all I managed was a few bullet points, before they go into the memory bank that is becoming increasingly challenging to access easily. So, here goes.

 

- Long flight is a pain, but a bigger pain is  a long flight split into many,

- It is very easy to fall in love and be amazed  with the place, you need to watch movies on Netflix and Prime regularly to temper the amazement,

- Just like the Bollywood movies, you realise that Hollywood movies give you a very distorted impression of the Americans. Just as a Bollywood movie watcher might believe that every other Punjabi is either dancing or eating or roaming around in London or Toronto all the time, regular

dose of Netflix/ Prime might leave you thinking that finding heterosexuals in the US  or Britain might be quite an effort. Thus, it was very heartening and pleasing to see mostly normal young families with children, toddlers, elderly parents and dogs at places frequently visited or malls.

- Texans believe everything about them is big, king-size, that self-esteem is so big that they built their capitol to reach 3 inches above the US Federal capitol and their flag flies at par with the Federal flag, not a few inches below as flags of the rest of the states do,

- No wonder Indian Americans are admired and in demand, everything they do is with a good slack built in within the law, mind you, while in the US - one can learn a lot from the ‘Sikhs for Justice’ and Pannuns, no wonder local enforcers are so loathe to book them. Of course, Rajat Guptas and Nishad Singhs of the world provide those essential miniscule exceptions,

- Now, one wonders if the latter exception is an indicator of total Americanisation of next gen Indian Americans,

- Indians would find driving in the US a big bore, more so because you need to stop at every other

'STOP' sign even when there are no vehicles approaching anywhere around,

‐ I was told the cops give a big slack to offenders and law violators, but punishment is swift when the redline is crossed, you only need to know where is the red line - very true, it was impossible not to smell the pot even in states where it is illegal,

- It is probably, only visiting senior Indians who can be found using pavements along the roads in the US outside big cities, if you leave out the dog walkers,

- It was quite an effort to convince the son that I'll not get lost or mugged and I needed to walk out of home and feel the air and the Sun, on the 3 days I spent at home - the fear of me getting into some problem was genuine while I had to even say I run a company to prove that I am not that forgetful!!!

- Paraphrasing a brother, America exemplifies sense of abundance taken to the extreme!!! While India spends millions educating us to banish single-use plastic bags and indeed, many of us do avoid such plastic, supermarkets in the US provide a plastic bag, even for big single items coming in boxes that you buy!

- The American influence on the Indian youth ( at least urban) is so strong - the daughter would flip the accent effortlessly and even interpreted what I meant to an airport staff, to think that I've been speaking and even thinking in English for not less than 3 decades now!! Howsoever young you feel at heart, children invariably find you outdated.

- While I had a hunch, it was confirmed - we in India are fast catching up with Americans in buying many things because there is a good offer and is well packaged- clothes, shoes and bags, for instance. That has nothing to do with need.

- The undeserved jersey I got as a gift at University of Texas (UT) Austin got me trying out the UT team's Greetings with many a Texans!!! 

The instant identification with the team was remarkable. I only wonder if the devoted fans of Chennai Super  Kings or Mumbai Indians match them,

- On the same vein, I got instant  greetings or comments ( you see Texans apparently cannot like anyone who doesn't follow their own teams) by several who saw my Georgia Bulls cap ( borrowed from the son While in India!), never mind that I know nothing about Georgia Bulls or American football!!!

- That I wore a Texan Long  Horn jersey even before I proved my loyalty to Arizona State University (ASU), my son's Alma Mater, did not leave him exactly very amused. The net result was - another undeserved jersey for me!!!

 

- America is a dream destination for a nature/ wilderness lover. That a life time isn't adequate to cover all of it is an understatement coming as it does from one who had only glimpses of it in 3/4 of the 50 states. You only need a big cash-chest or an incredibly rich and generous relative or friend who lives there to realise that dream.

- Grand Canyon is, simply GRAND. I was reminded of the experience on the banks of Manas Sarovar more than a decade ago, when I stood at the edge of the Horse Shoe Bend of the Colorado. Even if it sounds trite, it is an experience, not just a spectacle that can be seen in a picture or a video.

- The San Diego Zoo is special, not because it is so big or because you need to take a bus ride to estimate the time you require to see it in full or because its ropeway ride gives you some 200 ft view of the animals from above. It is because the way it is maintained and presented. It is an experience, not just an exhibition of rare animals.

- Regular warnings by the family to purge my instinctive attempts in public places to catch the eye of a passing child or an infant couldn’t be heeded. The pleasant part, however is, wherever I did succeed to catch the eye, I got a responding smile from the mothers as well!!! It is another matter that the family continues to believe that I was being socially incorrect and was potentially putting them in some risk,

- The time, effort and space that cousins and friends spared for us when we went visiting them left me with a sense of not just gratefulness but feeling very fortunate. Now, I can’t be saying that about the son even though that is the fact. So, I left him, even after the several gifts he had for me, with quite a straight message that there’ll be many more demands of him in the near future – to help me tick off the items in the bucket list,

 

- And finally, taking an Uber ride in a self-driven car was fun, that too a Jaguar!

Grateful or Vain?

 

A note I scribbled more than 2 years ago but forgot to complete or post. Its never too late to post, is it? Nevertheless, here it is.

Grateful or Vain

The sense that enveloped me as I disconnected the call from the son from an airport across the planet just after midnight was one of gratefulness. It is only the apprehension of sounding vain that prevents me from adding ‘humble’ to that. It took quite some time to fall asleep again as the awakened mind kept wandering off into several things that could have gone wrong in the last several years while the son completed his education and made it clear that he had no interest in plodding on further just to match my poorly hidden ambitions for him.

 I, of course, do not mean that I’ve been lucky to have survived without being rammed by a Japanese or a Korean SUV on the Ring Road or knocked off my feet by an adrenaline-blinded youth trying out wheelies on his fancy motorbike, as a friend was, more than a decade ago. Another school mate that killed himself from depression out of depravity made worse by excessive smoking and consumption that ironically, he sought refuge in to wish away his troubles, did come to mind, but not because I felt more fortunate.

It was gratefulness because, a 25 year-old, into a decent job in the land of opportunity, saw it fit to plan and call his old man, just at the stroke of midnight, while travelling in a time zone more than 12 hours behind. More so, as the picture of the 2 year-old that tried to keep pace with me walking on the solitary sands of the sea front in Minicoy island 23 years ago, was what was in front of the closed eyes, as I listened to the voice of this young man wishing me on another birthday. Well, for one thing, that is something I never did to my father, not that he ever expected me to. On the contrary, it was my father who organised a very special program when I hit 50 – he and the sister got my Guru playing Veena to a gathering of all the dear uncles, aunts and cousins!  That should be sufficient for any to agree that gratefulness is very much in order.

The tight hug and loud loving wishes in the morning of the little one, well, not so little at 16, did not leave me the mind space to have any feeling. I had to react, and respond in equal measure immediately, as otherwise she would have a go at the countable follicles on sides of the top. Lady luck hasn’t forgotten me was the thought a little later!  

As it turned out, it wasn’t the only thing to leave me humbled.  Getting wished warmly by the better-half, tired and resigned to her fate to tolerate all the idiosyncrasies of the man and yet finding it within her to wish the same man lovingly, is no less a fortune.

Numerous calls, hundreds of messages, even a few handwritten notes, from siblings, friends, cousins, acquaintances, even people who haven’t seen me nor Have I them, through the day, was more than enough to generate enough vanity. But honestly, feeling important and vain was surely blown over by the strong sense of gratitude.

Not a bad day to have spent, not at all.   

Regulator's tweak

 

Do we know all the factors that determine the cost of our home loans? We know the cost of ​deposits that ​the lending bank​ uses to make these loans,​ their overheads, their own profit margin ( bankers not only have to pay themselves decent bonuses but also reward the investors for their risk capital). Without going into the intricacies of how banks determine the capital required and the corresponding dividend to the investors, suffice to say that the regulator tweaks  the parameters that determine the amount of capital that banks have to have on their loans and to do more loans. 

What motivates the regulator to do these tweaks that keep the bankers at seat edge to keep changing their pricing strategies? To name a few, present flow of credit into the system and different types of loans like home loans, auto loans, personal loans and so on, inflation levels, capacity of the sectors that abs​orb​ this credit, to produce more and hence generate income at multiple levels or simply raise prices to fuel inflation.

Let us assume that the regulator is immune to any lobbying here. If the auto sector manages to influence the regulator to make the regulatory capital allocation lower for auto loans, banks may reduce the interest rate on auto loans inducing more people to buy cars, thu​s helping the auto companies grow their sales and hence profits. We'll assume here that the regulator isn't moved by any such efforts.

Banks have varying levels of capital allocation to be made on home loans based on the extent of finance they provide on the cost that their lenders pay for the properties they buy. This ratio called the Loan To Value (LTV)  is a common parameter that banker uses to ensure adequate security for their loans. Straight logic suggests that higher the loan amount or higher the LTV, higher is the risk demanding higher risk capital allocation. But who said straight logic works always in life, that too in the domain of high finance? While the straight logic remains the default position,  the regulator doesn't remain glued to this position always. It is more like the RBI uses it as a metric to induce banks to lend more or less or price loans more or less, based on the priorities of the time.

So, we come to the point to this long preface. One such small tweak happened last month to help banks pump a bit of adrenaline into their home loan sales force during the festive season. RBI has removed[1] the linkage to the loan amount making the requirement simple - higher the  LTV, higher is the regulatory capital allocation requirement. It is a flat 50% for home loans above 80% LTV and 35% for loans with LTV up to 80% ( banks are not expected to lend above 90% of the cost of acquisition ​o​f a property).

What does this mean to aspirant home buyers? Larger home loans should cost less as the blocked regulatory capital is reduced  and consequently the capital cost component of the cost of home loan has reduced. Of course, this applies to only incremental disbursements, I.e.  new loans.

So, go ahead, those looking to buy a bigger property, the cost of loan may just have reduced. Or has it?  If your banker still ​fixes a higher interest rate for a larger home loan, ​rather, hasn't changed the interest rate for large value home loans, ​you may try your luck flagging this tweak to get her to give you an improvement. 

Good luck and wish you a safe Deepavali, the festival of lights. 

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[1] https://m.rbi.org.in/Scripts/NotificationUser.aspx?Id=11984&Mode=0 

 

My FiL

 

To be honest, it was only my father's  passing five years ago, that made me appreciate the solid presence of the Father in Law (FiL), Dr. T. S. Vasan. Till then he was only the wife's father. But before I go on, a confession is in order. When I got to know   twenty seven years ago, this petite girl who I thought is someone I can spend my life with and to my good fortune, she also demurred, I came to know of an unexpected. That her father is an astrologer. It sounded strange, but more of that later. The kindly and wise visage noticed on meeting in person ( 'in person' would have sounded strange at that time, there being no other way of meeting!!) alleviated the unfamiliarity.

At his passing, I'm  reminded of the Mahatma's well known quip - my life is my message(or something to that effect). I discern several messages, rather lessons, from the life of Dr. Vasan, that ended on 9/11/20 a little after 86 years.

ZEST FOR LIFE
A child-like curiosity that he retained almost till the last few days, made Dr. Vasan, open to anything that life and surroundings threw up. He matched any youngster in upgrading cell phones, upgrading his wardrobe or searching the web for the latest trends in technology. Hailing from pre-digital generation, he easily migrated to the digital-migrant generation like me and was comfortable with the digital-native like his grandson. He retained an open mind to learning of new things, watch movies and serials on Netflix and Amazon Prime. I got to gifting a copy of Yuval Harari's 'Ascent of Sapiens' only for his 86th birthday two months ago, that I don't  think he got to read. It remains a regret that  I couldn't get response from him, who was on authority on Indian astrology, on Yuval's propositions on human history, culture and religion. I was too late.

ARROGANCE OF KNOWING BY HALF
We grew up in an environment where an occupation to provide for a decent life for self and family could be that of a doctor,  a lawyer , an auditor or land a salaried job, ideally in government/PSU/ Bank/ multinational co. or a teacher. Musician? May be,  but does it pay to make ends meet? There were several other odd jobs and occupations that people pursued, apparently not out of choice but out compulsion having missed out on any of these. Astrologer? 'Are you out of your mind?' wouldn't  have been a surprising counter to this suggestion. More so as that generation was imbibed with the vigor of  confidence in rationality that trashed anything that didn’t fit into the framework of rationality.
A person, hailing from an older generation when the freedom to choose an occupation was a luxury to most young people, choosing astrology as a profession, is something, I find extraordinary and extremely courageous. It becomes more remarkable when considering the fact that he was a qualified lawyer who had joined the Bar and had practiced for a while. Thus, it was a deliberate choice he made giving up another more attractive and lucrative profession. This is the courage part. And that is not all. It is but natural that he would have faced and sensed skepticism of his profession from numerous people around him. That he not only overcame such skepticism and was respected by not only his clients and students but also people knowing little about Indian astrology.  His mastery over his craft, his deep insight in this field of human knowledge that made him devise new methods of predictions and most important of all, the confidence he carried while putting across his views to the believers and skeptics, I’m sure, disabused many a skeptic recognize own arrogance of knowing by half, as I did. In this era, when well put 150 character expression can make a person, a celebrity and worse, an authority in any field of study, this arrogance is all pervasive. Never mind how much I know or whether  I appreciate the insights of the subject or not, superficial awareness is adequate for me to go forth and pronounce online a person demented or a field of study, heresy. When challenged professionally, his patience in explaining his craft, its logic and philosophy as also his confidence backed by his deep knowledge, showed up what I call the arrogance of knowing by half. Dr. Vasan showed me the need for me to recognize this myself.

PROFESSIONALISM

It was his desire to take up what his father had inherited and pursued that made him give up his legal career and dig into the documents and records his father, Pandit Sharma, had left behind, to start practicing Indian astrology. The remarkable fact about this is that, both Pandit Sharma and his wife, Rathnamma, passed within a year leaving behind a 17 year old Srinivasan (to become better known as Dr. T.S. Vasan later) and two younger sisters orphaned who were cared for by their aunt. Thus, it was almost fifteen years after his father’s passing that Dr. Vasan went about learning Indian astrology from the documents, books and papers his father had left behind. And indeed he did, to eventually become one of the most respected authorities in the field of Indian astrology. Thus, he inherited a tradition that he nurtured and made a profession of.  Unusual though his profession was, even in those times, in the seventies, eighties & nineties in the last century,  he persevered, dug deep to build up his knowledge and understanding of the subject to, not only become a scholar but to also practice and make a living off it. As I heard several of his students pour out their grief at his passing and express their respect for his scholarship during online condolence meetings , the thought that crossed my mind was – unlike most of them and most of his contemporaries, astrology was not a hobby, but his chosen profession, source of living for Dr. Vasan. His devotion to astrology was near total, everything else was secondary. Not only was he proud of his profession, he practiced every aspect that define a professional – deep knowledge, developed tools that added and facilitated smooth practice, client satisfaction and, punctuality.  He showed that the age-old wisdom from Manusmrti -  धर्मो रक्षति रक्षितः is a truism.

 

GENEROUS TO FAULT
It was probably the poverty (even by the standards of living in the middle of last century when Dr. Vasan was in his teens and twenties) that he survived that made him generous in his later years. He was generous in helping people, known and unknown, and more of people underprivileged – the maid servant, poor students or a relative in financial difficulties that found a ready benefactor in him. Not that he was careless with money, he certainly was not and accounted to himself for every rupee expended. He was clear on what can money be spent on and for what purpose. He is a textbook example to quote to substantiate a popular piece of wisdom that is shared generously – The more one gives, the more one gets. I can’t say if he believed in this, but for sure, he gave generously without expecting to get, but get, he did. It was not only generosity in kind that defined him, it was as much the generosity of heart. His ready smile, the pleasant demeanor, empathy  and patience that made a friend to numerous generations – his own, his children’s and grand children’s. And probably it is this quality that helped him excel professionally.

 

FOCUS

He had this ability that he had developed by practice to shift all the focus on to the project at hand. Be it a seminar he had to preside over, a paper he was publishing, a book he was writing or the next client meeting. All the attention would be diverted to the task at hand and nothing and none could divert him from that. Pleasant though he was almost to a fault, I found him irritated if disturbed at his task. He had a trick to avoid such irritations – he would completely ignore any diversions from anyone. Its fair to say, it is this focus and passion he brought to anything he did, at the ripe age of 86, that gained him respect from the outside world, even if it gained reprobation of his dear wife and children. You don’t expect your 85 year old spouse/ parent  to tick you off when interrupted while he is reading/ writing, do you? A typical 85 year-old should have all the time on the world to, indeed, waiting, to listen to the spouse/ children, isn’t it? Well, Dr. Vasan was different, he was much younger than his chronological 85 years and he certainly had not ‘retired’.

 Dr. Vasan, my FiL will be badly missed. 

 Covid-19 Loan Resolution Framework

The collateral damage from the Covid-19 pandemic has, arguably, been and will be more devastating or at least as damaging, as the loss of lives and livelihoods the pandemic itself has caused. In the Indian context, one of most strict lock downs was put in place during March – April, 2020, to prevent immediate spread of the infection. One of the collateral damages has been the stress caused to the loan portfolios of Banks whose exposures to  Indian businesses, big and small, in both manufacturing and service sectors, that suffered almost total loss of revenue and liquidity for the period of lock downs and subsequent months when local restrictions and loss of confidence and fear are still preventing resumption of normal business activities.

The moratorium announced by RBI in April, 2020, was an emergency palliative to let borrowers avoid default. But as recognized by everyone involved, moratoria, however elongated, cannot be a cure. On the contrary, longer freeze of debt servicing would only make it worse, as interest for the period of moratoria cannot be wished away, much as people may hope to. In no time will the lenders’ capacity to service their deposits be affected shaking the very foundations of the economy.  Recognising this, government announced substantial relief measures to the MSME sector in June, 2020 through  debt restructuring, additional long term funding support to the lenders  and even equity support to entrepreneurs.

For other businesses, RBI devised a new framework [1]for management of stress in the asset portfolio of Banks. This framework comprises the following salient features.

1.       This framework is applicable to any financial stress caused ONLY due to Covid-19 pandemic and thus for a borrower to avail of the reliefs in this framework, the exposure of lenders to a borrower eligible otherwise, should have not been in default for more than 30 days on 1^st March, 2020.

2.       RBI had set the timelines for this framework earlier that the eligible borrowers should be identified latest by 31^st December,2020 and the resolution process should be completed within 90 days in case of personal loans and 180 days for non-personal loans,  from initiation. Further, ‘completion’ of the resolution has been defined –

a.       Completion of all the related documentation with the borrower and between lenders,

b.      The restructuring changes actually reflected in the books of the lender and

c.       Under the revised terms, borrower is not in default.

3.       The stress resolution plan can include

a.       moratorium,

b.       rescheduling of the repayment terms like number of installments,

c.       conversion of interest accrued and to be accrued into future installments, based on the assessed income streams of the borrower, extending up to two years.

d.      Conversion into equity any part of the outstanding debt or other marketable debt instruments

4.       In case of borrowers with multiple lenders, the resolution plan should be approved by all the lenders through an Inter Creditor Agreement (ICA) within 30 days from the day the plan is invoked. Further, if at least 60% of the lenders (75% by value) do not join the ICA within these 30 days, the resolution plan fails and there can be no other resolution under this framework, i.e., for Covid-19 caused stress.

5.        The ICA should also have mechanisms for redressing differences and disputes among the lenders and RBI will not interfere or arbitrate.  The resolution process will stop if any of the timelines are breached or any inter-lender disputes remain unresolved.

6.       An independent credit evaluation (ICE) by  a credit rating agency (CRA) is mandatory for approving resolution plans for aggregate exposure of 100 crores or more.

7.       Borrowers not covered in this framework are:

a.       MSME borrowers with aggregate exposure of 25 crores

b.      HFCs  where a restructuring  has already been done)

c.       Agricultural credit  and related intermediaries like Primary Agricultural Co-operatives

d.      Governments – central, state or local and corporate set up by an act of Parliament and undertakings

e.      Financial services providers.

 To quickly rollout the framework that Banks can implement, RBI set up a committee headed by K.V. Kamath,[2] ex- CEO of New Development Bank and ex-Chairman of ICICI Bank Ltd. to suggest sector-specific financial parameters  any other conditions for preparation of the RPs. This committee has also been mandated to validate and monitor implementation of the RP in case of borrowers with aggregate exposure of 1500 crores or more to ensure adherence to the framework without going into the commercial judgement of the lenders.

Highlights of the Kamath Committee are

1.       Looked at the sectors substantially funded by the banking sector and  impacted by the pandemic and classified the sectors into four categories –

a.       11 sectors like construction, auto, NBFC, etc. that had pre-existing stress and were also impacted by the pandemic

b.      19 sectors like retail and wholesale trade, cement, tourism and travel, that did not have any pre-existing stress but were impacted by the pandemic,

c.       2 sectors – telecom and tea that had pre-existing stress but were not impacted by the pandemic

d.      11 sectors like agri and allied products, food products, FMCG, that did not have any pre-existing stress and  were not severely impacted

Sectors were classified based on varying severity of impact - mild, moderate or severe. 

2.       The financial parameters that should be considered for preparing the RPs are

·         Total Outside Liability / Adjusted Tangible Net Worth (TOL / Adjusted TNW)

·         Total Debt / Earnings Before Interest, Depreciation, Tax and Amortisation(EBIDTA)

·         Current Ratio

·         Debt Service Coverage Ratio (DSCR)

·         Average Debt Service Coverage Ratio (ADSCR)

3.       Based on the severity of impact of the pandemic and exposure of the lenders, 26 business sectors have been identified with financial parameters to be considered for RP.

4.       The range for the financial parameters have been defined for these sectors with broad guidelines –

a.       The RP may be prepared based on the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21 / FY22 and subsequent years.

b.      The threshold TOL/Adjusted TNW and Debt/ EBIDTA ratios should be met by FY23.

c.       The other three threshold ratios, viz., CR, DSCR and ADSCR,  should be met for each year of the projections starting from FY22. The base case financial projections need to be prepared as part of RP.

d.      Lenders may determine their own range for other sectors for which the parameters have not been defined with the baseline parameters of CR and DSCR of 1.00 and ADSCR of 1.20.

5.       For a few sectors, exceptions have been defined based on the industry nature and practices  like

a.       Automobile sector that practices Just In Time (JIT) principle for inventory,

b.      aviation sector that finances its aircraft largely through debt refinancing and work cash & carry model for revenue, carry advances form customers and up to 9 months’ credit from vendors,

c.       Roads sector to which ratios like TOL / ATNW, Debt/EBITDA and Current ratio may not be relevant

d.      Wholesale trade that does not normally raise term debt and hence DSCR and ADSCR are not relevant.

e.      Real estate borrowers’ assessment should be based on individual projects.

With the broad guidelines on preparing the RPs and the specific parameters on which the borrowers may be assessed to prepare the RPs, the framework is ready for the lenders is ready to go.

There have been comments that the requirement of formation of ICA is impractical and would lead to delays. The Kamath committee has also mentioned about the efforts required in identifying eligible borrowers, assessing the impact of the pandemic, structuring the RP and coordinating with their lenders to form working ICA but has probably for lack of mandate, hasn’t suggested any relaxation of the timelines. Thus the lenders’ position is hardly enviable.

Apart from having to bear the heavy additional load of stress in their asset portfolio due to the pandemic in addition to several other challenges they face, they also have been gifted very tight timelines to devise and implement the RPs, the success or failure of which will impact them. And they have two monitors to deal with – RBI, the regulator which has also stated that compliance with these requirements ‘shall be assessed for all lending institutions as part of the supervisory review’ and the Kamath committee to oversee RP implementation in case of large borrowers. One thing is for sure - Indian Banking is a sector that will be under very close scrutiny both within and from outside, in public and private, for the foreseeable future.

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[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11961&Mode=0

 [2] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1157

 

Timely Move

 

RBI’s helping hand to banks - August, 2020

Who else but RBI to come to the rescue of Indian banks, groaning under several loads, bad loans being the heaviest, that have rendered them almost crippled? In February, 2018, RBI issued a direction to Banks[1] with a stern instruction to resolve non-performing loans of large corporate borrowers, even identifying the 12 largest and most painful borrowers. Not just that, the direction also mandated a clear break from the past goading banks to move towards time-bound  resolution of bad loans by putting to use the new Insolvency & Bankruptcy Code (IBC) and the very way banks recognize default. Due to the legal challenges that this instruction faced, RBI came out with revised direction in June, 2019[2] that retained the gist of the February, 2018 direction. Both of these kept the stressed Small & Micro loans, exposures to finance companies, and retail loans out of their purview.

The moratorium on loan servicing announced by RBI ends by August 31, 2020 after an extension. Obviously, moratorium is only a pause, to help businesses and individuals to manage with the lockdown and consequent economic fall out and was just a temporary relief during a crisis, at best, something that could not continue. Banks have also been very apprehensive of the health of their loans as the interest and installment s for the moratorium period will need to be collected in September even though the economic fallout of the pandemic, that is still expanding its spread, is deep and will last for years, certainly not months. Thus, an extraordinary measure to provide relief to Banks, yet to fully overcome the legacy loan impairment problem, who fear a major hit on their loan portfolios, has been , not just an expectation, but a necessity. On August 6, 2020, RBI has issued a resolution framework[3] for stressed loans, specifically caused as a collateral damage of Covid-19 pandemic. Given that even the latest direction also dealt only with large borrowers (with aggregate exposure of at least Rs. 25 crores), it is obvious that, not only is large bad loan resolution very much a work in progress, it is only getting bigger.

The latest direction, unlike both of February, 2018 and September, 2019, has not left the resolution structures to the Banks. It has been left to be devised and even monitored by an expert group headed by K.V. Kamath, ex-ICICI Chairman, just back after stint as President of New Development Bank in Shanghai. Banks have largely used the structures, , that had been mandated by RBI earlier from time to time, but withdrawn while issuing the February, 2018 direction, with slight modifications and customization for resolving their impaired assets. The resolution mechanisms have included loan restructuring by extending the servicing periods, separating a non-serviceable portion to be converted into a security, reducing the interest rate, replacement of the promoter by another investor, change of management, conversion of a portion into equity, writing off a portion of the loan as loss and if none of these are feasible or fail, liquidation through the IBC framework.

It is not as if everything has been left to the expert group to decide. The framework within which any resolution plan is implemented by Banks, has be advised by RBI. The broad contours are:

·         The new framework is applicable only to

o   personal loans, corporate exposures and MSME exposures exceeding Rs. 25 crores.

o   loans that were classified ‘standard’ and were not in default for more than 30days on March 1, 2020 and on the day the resolution plan is invoked.

·         Where more than one lender is involved, the resolution plan should have the approval of at least 75% by value and 60% by number of the lenders.

·         The resolution plan should be invoked before December 31, 2020 and should be implemented within 90 days for personal loans and 180 days for non –personal loans.

·         The expert committee will vet the resolution plan for all exposures of Rs. 1,500 crores or more.

·         Any extension in the loan servicing term should not exceed 2 years.

·         While conversion of loans into non-convertible security or equity should stick to the guidelines already in place under the prudential norms[4], conversion into any other security should be at a collective value of Rs. 1.

·         In case of personal loans that are put through a resolution in this framework, Banks should provide as per the existing norms for loan loss provisioning[5], minimum 10% of the renegotiated loan under this framework.

·         Banks can write back the additional provisions made in two stages provided the borrowers repay at least 20% and another 10% of the renegotiated loan.

·         If there is a default on a non-personal loan under resolution monitoring period till payment of the second installment of 10%, a review period of 30 days is triggered. If there is no payment within the notice period and the loan remains in default, the loan will be classified as NPA.

It becomes clear that this framework is exclusively for the help of borrowers to manage the liquidity and loss of business due to the pandemic. Neither banks for their existing stressed portfolios nor the delinquent borrowers can hope to get any relief in this framework.

 It demands very swift and systematic action by bankers to identify the eligible borrowers and implement workable resolution plans within tight timelines, something that neither Banks nor the borrowers have a good past record in. But then, it is a need, more of the borrowers and banks themselves, more than of the regulator. We will be able to see within a year if this worked and to what extent.

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[1] https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11218

[2] https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11580

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&Mode=0 

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9904

[5] https://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9908

Nursing SME

Small and Micro Enterprises (SME) top the public dialogue today on surviving the Covid19 pandemic in India. And why not - SMEs as a sector is the highest employment generator with more potential, the largest source of exports and a relatively lower contributor of non-performing loans (NPL) to the financial sector. In the immediate post-pandemic situation when employment and re-employment should demand the big attention of the government, SMEs naturally claim the top priority. While it is true that the space for free suggestions is already crowded, most such suggestions fall into three categories - industry lobbies that mostly seek freebies, waivers and reliefs, lenders' appeals that seek regulatory reliefs to help them postpone or avoid making provisions for the expected loan losses and government's own internal (selectively leaked) plans to dole out subsidies while increasing bureaucratic control over the sector through more controls, approvals, releases, etc.. There isn't much time for the government to study through committees and review their reports through more committees.  There is a economic and social disaster just about to unveil without big, laid out action plans.

Here are a few thoughts from an end, that isn't part of the SME sector, lender or from within government, on strategy for nursing the SME sector to back on to its legs from its current state of Shavasana. Two caveats are in order - 

1. It is assumed that the country and the government are ready for a bout of fiscal deficit putting the FRBM in a short nap of a few years,

2. No numbers are used here as the numbers are all with the support system of the decision makers..

Immediate challenges of an SME are   

1. Immediate financial obligation servicing - RBI has given a 3 month holiday which, in all likelihood will get extended. But that only postpones the inevitable and makes it worse as SMEs can, in no way, be expected caugh up interest for past 6 months in one go.  The payment after 3 months or later will have had compounding  effect as no Bank will forego interest on amounts due. Hence, that's a postponement of a problem, not a solution. It is just the oxygen while ventilator. to be weaned ASAP.

2. Activity is closed with zero cash flows, but fixed overheads, including salaries, are piling up, putting the post-pandemic future  with a big handicap. Effectively, 2-3 months' fixed overheads is an additional liability that future earnings (whenever operations recommence) have to bear. An SME will continue to be strained for liquidity over the next 2 - 3 months after the restart till they reach normal levels of activity.  SME will need funding support that does to put its recovery phase in a serious handicap of having to immediately absorb this absorbing these funds in their cash fows. 

3. Getting back contract labour - given that anything from 20% to 50% of the workforce is on contract basis in a SME and these temporary workers would have moved away and may not return in full strength, at least for some time, quality manpower in the short term is a challenge. A reduction in the wages and salaries to manage thruough the difficult period of recuperation may be acceptable in the market. But some of the savings from that may also be consumed by the higher wages that firms may have to shell out to get back dispersed essential labour. In sum, it will be a premise for increased working capital funding in short term. No better time than now for government to push through long pending labour reforms to provide flexibility to the promoter and freedom to the worker and universalise social security cover to unorganised labour.

4. Supply side - the lock down having made everyone sit on unsold stocks for 2 months or more, the average purchase cost would be lower initially at re-start and even over the short term. This helps the SME reduce the costs and some of the reduction may persist and be sustained over longer time based on the demand supply situation.

5. Demand side - customers off take would be lower and given that some kind of social distancing norms will persist in the near future, demand may not reach attractive levels or even break even levels for sometime, even up to 2 years. Challenge will be to sustain the business with cash support that may be required for longish times, even  up to 2 years.

6. Given the overall cash flow crunch across the system, an obvious problem to be expected in delayed payments by customers who are typically medium or large corporates.

7. Unlike previous instances of difficulties, this pandemic has most of European American markets which are the major export markets for SMEs are affected to an extent unseen by many of the current generation. This also opens a window of opportunity for Indian SMEs to gain back their market share. The erosion of trust in the China and its super - efficient suppliers also provides a never - before opportunity to Indian SMEs expand their market share.

8. Given this, it is two needs that are obvious - immediate liquidity support, help in gaining financial strength to to quickly get back to normal working and strategic support to join the global supply chains that have been dominated by China for sometime now. The immediate action points:

(i) firms need long term funds to the extent of anything from three to 5 months' sales, an amount that can be expected to be nearly twice their existing working capital loans and far more than an amount that they can take on as a regular loan to be serviced, even in a short term of 1 -2 years. But that means forcing the already reluctant banks to to do unattractive loans. But these loans should be made attractive to the Banks on one hand and affordable to the SMEs. This can be through a combination of the following two ways.

(a) Medium term loan to fund 66.67% of this requirement with 5 years' repayment period with a six months' holiday, that shall be backed up by first loss deficiency Guarantee (FLDG), to the extent of 25%  by  Credit Guarantee Fund Trust for Micro and Small  Enterprises (CGTMSE). The SME shall pay a commission in the normal course for this guarantee to CGTMSE. Given this mitigant the loan becomes attractive to the Banks and sustainable to the SMEs whose payout, including the guarantee commission, in the first half year will be at little above RBI's Repo Rate, say around 6-% in the near future, The FLDG from CGTSME should be restricted two years from disbursement subject to half - yearly review.. 

(b)  Provide a subvention of 2% of the discount rate for bills of SMEs that are put out through Trade Receivables & Credit Exchange (TCE) of RBI for trading. With an initial nudge guidance from RBI, banks will move to TCE to finance the receivables and book debts of their SME clients, also followed by corporates once the volumes pick up. This will  also gradually help in price discovery for SME funding.

(c) The remaining 33.33% of the funding requirement should be provided as equity by the central government through a trust set up for this purpose. The trust should have government representation but no control. While it shall be funded by the government, it should have a specific timeline to dissolve itself. The dissolution can be through liquidating its holdings first by the respective SME promoter and to any other bodies like industry associations or investment funds pension funds, etc.. A suitable exchange that makes it easier for SMEs to be listed with on the lines of NASDAQ is a natural development that SEBI can help incubate. This would also provide an opportunity and incentive to SMEs to go public to grow.  

(ii) Not all SMEs would be able to sustain operations and continued support to those that are unable get out of their difficulties within a period of one year may end up being good cash down the drain. The CGTSME cover should be subject to review on a quarterly basis subject to lending bank's review. Either at the entrepreneur's initiative or as a result of bank's review, a quick liquidation process may be initiated under IBC. It requires a tweaking of the IBC to make it an exclusive process for SMEs by permitting the process to go under retail liquidation process that has much shorter timelines than than the normal corporate insolvency process.

(iii) the costs involved in these steps to the exchequer are - the losses that CGTSME may suffer on the FLDG net of the commission it collects from SMEs and the 2% cost of subvention on bill finance through TCE. Both of these should be provided by the central government through budgetary allocation. 

(iv) One the second need, the brilliant minds at Niti Ayog and the central ministries and industry bodies are, for sure, already at work and it would be  a fallacy to attempt adding anything what they already know and will articulate.

All of these require quick government action, both legislative and administrative and regulatory action.The most important point is immediate, comprehensive and effective implementation, JanDhan accounts and Ujwala cooking gas connection would be good benchmarks to follow.