Loan restructuring, moratorium should happen simultaneously, says former Chief Statistician Pronab Sen

Apex bank Reserve Bank of India (RBI)'s loan restructuring plan should have happened along with the announcement of the moratorium on loan repayment to benefit maximum number of companies impacted by COVID-19 triggered economic disruption and loss of business, according to Pronab Sen, former Chief Statistician of India.  

In an interaction with BusinessToday.In, Sen says that once the moratorium is lifted interest payments will be due and a lot of troubled companies may unable to make payments until economic growth picks up.  

"The loan restructuring that the banks are going to do, should have happened earlier. That process should have started while the moratorium was still on. The restructuring of loans is a time-consuming process, it cannot be done overnight and over a particular limit, these things have to go to the Board (for approvals). These things take time," Sen said. According to him, a lot of companies for no fault of theirs could be declared non-performing assets (NPAs) if the process took more than three months. He says such firms would have survived, if the restructuring had happened earlier and done by the time the moratorium ended.  

Also read: How banks will restructure your home and auto loans

Sen, however, was not in favour of a very long moratorium either as a two-year moratorium would mean banks remaining in the dark without any information about the financial health of those companies that are availing such benefit. "It is a bad idea for the very simple reason that banks will get absolutely no information, they wouldn't know which company died, and which one is going to be an NPA. It will have a serious information gap for the banks and the banks' decision-making ability would simply get wiped out," he says.  

According to Sen, moratorium should not be for too long. "Three to four months is fine, it just gives you time to get your act together. Extensive moratorium is a serious problem," he adds. Early this week, RBI had released the recommendations of the K V Kamath led committee on the framework that should guide the "Resolution Framework for Covid-19 related Stress". The committee had proposed loan restructuring plan for 26 industrial sectors including hard hit sectors like power, real estate, hotel and tourism, and aviation.  

Also read: Five ratios by RBI's KV Kamath panel for 26 COVID-19 hit sectors

The moratorium on loan repayment was first announced in March 2020 to provide relief to the lockdown hit industries and business establishments. RBI had later extended till August 31, 2020.

Also read: Loan moratorium update: Supreme Court hearing on interest waiver case underway