Trouble persists, RBI subsists

Recognising the fact that consumers are distressed by an acute liquidity crunch due to the pandemic, the NBFCs demanded a one-time restructuring of all loans upto March 2021 in a conference with the RBI governor yesterday. The other request from all financial stakeholders - NBFCs and MFIs - was to put an end to incessant downgrading by credit rating agencies in these trying times.

So what’s a restructured loan, for starters? When a financial corporation senses that it’s highly likely for a borrower to default, it refurbishes the existing loan with brand new terms - either entailing lower interest rates or a longer time horizon over which the borrower can discharge his dues. In some cases, it can also take the shape of debt being converted to equity - so a creditor would pay part of his loan in return for equity stakeholding in the company. Why would any sane financial entity suffer loss by easing up on the terms - that’s because this borrower is already in doldrums, probably about to go bankrupt, or not in a position to repay its loan, atleast at the moment. So the financial entity might as well scoop in the money, while it can, even if it comes at the cost of lower interest rates or deferred payments. As of now, RBI has permitted NBFCs for a one-time restructuring of loans given out to MSMEs till December 2020. But the NBFCs want to extend this whole restructuring deal to include all of their borrowers, and loans upto 2021. The other request was to relax provisioning norms and asset classification norms. In its last ruling, RBI asked all NBFCs to create a 10 percent provision for any loan that falls behind even 1 day after the due date, in case where a moratorium has been granted. 

Furthermore, the NBFCs require an extension of the moratorium (just as they’ve provided to the consumers), and MFIs want consumer moratoriums to be extended till June 30. NBFCs also seek to be able to raise more capital on a 3-year basis from Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD) through refinancing, so as to resolve the problem of asset-liability mismatch - which has always remained a nagging problem in these financial institutions which borrow on a short-term basis and lend on a long-term bases, thus leading to the build-up of a liquidity crisis for meeting short-term needs. And update on the moratorium - the RBI has ceded to the demand of NBFCs by providing a three-month moratorium.