Companies may request for debt restructuring which by most pessimistic estimates could be a maximum up to ₹1 lakh crore, according to State Bank of India’s (SBI) economic research report “Ecowrap”.

The report, put together by SBI’s economic research department, attributed the lower restructuring amount for companies against the originally envisaged amount of up to ₹7 lakh crore to the Reserve Bank of India (RBI) and Banks systematically bringing in borrower financial discipline much before the Covid-19 pandemic.

This made the borrowers realise that timely payment of interest and instalment is necessary and any breach in that will affect their rating and pricing will be increased, it added.

In terms of numbers, assuming 15-20 per cent of the corporates had opted for a moratorium, based on SBI’s earlier analysis, the restructuring amount originally envisaged was up to ₹7 lakh crore.

“We estimate based on our feedback and granular data analysis that only around 15-20 per cent of the companies, from the said amount, may request for a debt restructuring which by most pessimistic estimates could be a maximum up to ₹1 lakh crore,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

However, he felt that sectors such as MSME (micro, small and medium enterprises) and agriculture might continue to be in stress for some time and require to be monitored and handheld.

Regarding agriculture, Ghosh observed it seems to be that the KYC (know your customer) update may have been lagging because of lockdown, and a part of this is now getting pulled back.

Positive surprise

“As we close in on winter of 2020, India’s financial sector is riding the pandemic with positive surprise. Notably, it is now apparent that the big fear of large slippage in asset quality of banks is unfounded with Indian banks guiding at much lower credit cost than even their Asian counterparts!” Ghosh said

“As far as our understanding goes, very few of the borrowers have till date applied for restructuring and incrementally such borrowers are likely to be much lower,” he added.

Ghosh underscored that this is a notable climb-down from the base case scenario and it is mostly a part of the humongous efforts of the banks to redesign the banker and corporate relationship since the unveiling of AQR (asset quality review).

Negative externalities

“We believe, in this scenario, what is currently happening is that banks have been largely able to convince the corporates not to go for a restructuring given the negative externalities.

“Much credit should be given to RBI in this context as 6 month moratorium on interest and instalment till August resulted in surplus in the hands of borrowers and it gave confidence to the borrowers to service the debt without any restructuring,” explained Ghosh.

Moreover, the additional debt given as emergency funding to all the borrowers by the banks increased the liquidity in their hands that was further facilitated by significant scaling down of employee and operational costs. In some cases, it is also possible that locked up fund elsewhere was used to repay the debt.

The emergency credit guarantee scheme coupled with additional loanable funds made available seems to have facilitated the turnaround.

“Clearly, the financial discipline assiduously inculcated makes us to believe that, we were able to attain the Nash Equilibrium (a situation, where both the borrower and the lender had no incentive to deviate from the payoff matrix) in period 1 itself without a restructuring!,” Ghosh said.

Behavioural changes

“We are also flabbergasted to see a lot of behavioural changes during pandemic by the borrowers that gives a new sense of belief to the outlook of our financial sector against doomsday commentaries.

“For example, we clearly observe that some of the companies have deliberately reduced the loanable funds during H1FY21 (April-September) by reducing their liquid assets -- cash and bank balance -- in the balance sheet and this served them in good stead,” Ghosh said.

Also, even though several sectors have reported de-growth in key parameters, the report observed that these sectors have reduced cost wherever possible to stay afloat. Many sectors also reduced employee cost ranging from 5 to 30 per cent, though it may impact consumption adversely in future, the report said.

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