Give Credit Where Credit is Due

Context: Financial Stability Report’s projection of a sharp surge in the ratio of gross Non-Performing Assets (NPAs), indicates a sharp fall in the net worth of borrowers and lending banks.

Consequences of the rising NPAs

• Liquidity crisis for borrowers: who are in the need of higher liquidity for 
• Funding slowdown in customer payments
• Loan repayments
• Contracted liabilities and higher inventory and debtor levels.
• Stringent conditions of credit sanctions restrict borrowers access to the loan.
• Crisis for banks operating on a Capital Adequacy Ratio (CAR) of less than 15%. 

Way Forward

• Liberalise Scheme for the borrowers: Reducing the margin money from 25% to 10% up to March 31, 2021, then changed to 17.5% and back to 25% as on March 31, 2022, and March 31, 2023, respectively.
• Without margin money availability, borrowers can’t utilise even sanctioned credit.
• Convert Credit Loss into special term loan: repayable after four years
• Credit losses must not be counted for debt-equity ratio in the repayment period. 
• Increase the holding period levels of inventory to four months.
• Categorising the borrowers: will lead to a better capital-output ratio by higher capacity utilisation. Borrowers should be grouped into: 

1. Companies with a good performance record
2. Stressed assets but with a good record in other group companies
3. Stressed assets but with no management record of good performance
4. Special sectors like NBFCs, real estate, tourism and hotels
5. SMEs with a turnover above ?100 crores not covered under present SME schemes.

• Set up quasi-equity investor fund: to provide equity or quasi-equity support in some categories and special sectors.
• Managing stressed assets:
• Providing options: to badly managed assets - 

• Selling out
• Merging with bigger companies
• Loans being converted to capital and sold to asset reconstruction companies, or to open bidders. 

• Make a clear announcement of a takeover credit scheme: with longer repayment.
• Amend taxation laws: to allow benefits for infrastructure industries to be available even in mergers are also required. 
• Increase efficiency and recapitalisation of PSBs: through privatisation 
• Sell out part-shares now and give management control, while retaining the right to sell the balance later in the open market.

Conclusion: A feasible credit scheme for the borrower will help in mitigating the NPA crisis.