Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

RBI Allows 60 Day More Time for Small Borrowers. This is NOT a Corporate Bailout.

RBI.png

In view of the major change in the economy due to the withdrawal of 500/1000 notes, the RBI has decided to give finance companies a reprieve on recording NPAs.
In a notification, RBI has asked fin companies to not classify accounts as NPA if they don’t pay between November 1 and December 30, and instead, give them 60 days  more before they go into the NPA bucket.
RBI
This sounds complex. So let us decode this.
If a loan isn’t paid in 90 days (principal or interest) from a due date, it becomes “substandard”, or the first level of NPA. This means the bank has to provide for a loss of money, equal to 15% of the amount owed. (this eats from its profit).  For non-banking companies this could be 180 days, and in some crop loans from banks, as much as 365 days. That’s the “extant” regulation norms.
Banks and financiers hurt when an account goes into NPA because it eats into their profits (and can cause losses too).
Now, because people may not be able to pay due to the economic hit, RBI is allowing banks to “defer” calling an account the NPA by giving 60 extra days. So if 90 days was the norm, and the 90th day falls in the period between Nov 1 and Dec 31, then the account gets another 60 days before it’s called an NPA.

Not a Corporate Bailout: Don’t Go Soc-Mad

Social Media has the collective intelligence of a conveyer belt nowadays. They forward just about anything without checking if it’s correct. Therefore I expect a lot of people to go “soc-mad” which is a term for otherwise sane people turning clinically insane because there was something juicy to forward.
And what will be forwarded is “This is a bailout of Vijay Mallya and other corporate borrowers!”. This is WRONG.
This new rule only applies to term loans or working capital loans upto Rs. 1 crore, to terms loans upto Rs. 1 crore, and to loans taken by NBFCs or Microfinance institutions from banks. Therefore no corporate loans, which are typically greater than one crore rupees, will get any reprieve.

Will This Help?

If the problem is liquidity, this will help. Oh, I can’t pay the bank because my customer hasn’t paid me because there isn’t cash available = okay. That means when the customer pays me, I will pay the bank. This is a liquidity issue.
If the problem is solvency, it won’t. Meaning, if I can’tpay the bank because I have no customers coming into my shop, because they usually pay in cash and they don’t have cash = big problem. If the person is running a low margin business, these two months may not see business happen, which hurts the ability to pay. If a business has actually gone bust in these two months, then the recognition of it going “bust” will only happen 60 days later.
Overall, we expect more such “forbearance” from the RBI. Because the RBI has gone and done something drastic, so they can’t expect the same rules for banks. But remember that any such forbearance will be temporary – since we have to follow Basel rules eventually, any relaxations in NPA recognition cannot last longer than a year. However, we do expect that while the rules are meant to be to help banks tide over a crisis, there will be the repeat of an “extend and pretend” concept by banks – where, even if they know an account is a bad loan, they will try to say it’s not an NPA. Let’s hope this does not become a systemic issue.

  • This interpretation is incorrect, including your headline. Media has misreported this circular as a “EMI holiday” but there is no such thing. RBI has NOT given any extra time to borrowers to repay, the concession is only for the lenders in their recognition of NPAs. This means, if the borrower defaults, penal interest will kick in, borrower will be reported to credit bureau as having missed the due date and in general everything that applies to missing a payment will apply.
    Now I fear the fallout of this mis-reportingis that even borrowers who are in a position to repay will not repay, compounding the problems.

    • True – I should have worded the heading better. The idea is that banks can get to recognize NPAs later, but you’re right – borrowers have issues right now (and I think RBI will come out with a credit bureau relaxation too – makes no sense to give an allowance to banks but not to borrowers in terms of default tagging).