A reform that demands more attention

Awareness of the banking sector's many initiatives to help stressed businesses tide over the pandemic is low

Most economies around the world are stressed due to Covid-19. Developing economies, however, will suffer more due to the pandemic. Indian economy is no exception, as it is characterised by a large number of small and medium enterprises, which work on thin resource, but on an aggregate employ more people. The government has provided some support by way of stimulus programmes, but with scarce resources available to it, there are limitations.

The banking regulator and the banking industry have provided substantial support through several measures including managing liquidity. The regulation framework for Covid-19-related stress is one of the major reforms in this regard. The reform is aimed at benefiting those businesses which were performing and have stress only due to the pandemic. In as much as, and at the cost of citing an analogy to drive home the point, taking a Covid-19 patient to a medical care unit meant for treatment but ensuring we do not take patients with other ailments, chronic or otherwise to such care units. What is unfortunate, however, is that the reform demands more attention from the borrowers, bankers and other stakeholders.

To evaluate the impact of this reform, let us examine its coverage. According to the Reserve Bank of India (RBI) and banking industry classification, all banking exposures fall in one of the 300-odd sectors. The resolution framework announced by the regulator aims at identifying those which were impacted only due to Covid-19. This has been done by way of clear financial parameters to ensure a quick treatment or support as long as  businesses meet the conditions articulated in the reform including the quality of asset, period of support required, under mid, moderate or severe classifications and other requirements. The objective behind this approach is clear. If the exposure is a standard asset at the time of resolution and thereafter, and the period of resolution is within two years, it need not go through the process otherwise applicable to other stressed assets. This ensures quick decision-making and faster availability of support.

Of the sectors, 26 stand out in regard to the stress and financial parameters. These were stressed even before the pandemic and need a different treatment available in the existing regulations and for below-standard or non-performing assets. In some of the cases, they face larger demand-related or structural issues. It is essential to ensure that the banking sector provides faster support to the remaining 280-odd sectors where the borrowers may meet the financial parameters identified under this programme and are eligible to avail of the benefit. It must be recognised that admitting others in the guise of Covid-19-related stress would put the banking system in significant stress. 

 Unfortunately, the extent of borrower response to the banking companies to seek resolution has not been very encouraging so far. This is borne out of a quick survey with the bankers. This calls for some analysis. Various factors could have caused this. The one factor that appears to have contributed to this is the awareness of the reform is the media coverage on the subject, both television and print. An examination of coverage available in the public domain suggests that there was more coverage and discussion on sectors not covered under this programme, rather than otherwise. Discussion and debate on sectors such as real estate, non-banking financial companies, power, infrastructure dominated the coverage.

illustration: Binay Sinha

Against this backdrop, perhaps two stakeholders should own more responsibility to create awareness. The trade bodies such as the Associated Chambers of Commerce of India, Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry at the national level and several commerce and industry chambers at the regional or sectoral level should educate and assist the members, particularly the mid-sized and small business to help them avail of rightful benefits of the programme. The large corporates have their own professional staff or advisers to evaluate the programme. The corporates which enjoy good ratings have other options for funding their business in any case. More awareness and guidance from these bodies could go a long way in this regard.

 The second stakeholder is the bankers association and the banking companies themselves. It is in the interest of both the parties to speed up relief to the borrowers who meet the parameters. Communication to the borrowers with established track record may be proactively approached by the branch network of the banking system. The bankers will serve their customers by ensuring that they remain performing and reduce likely stress on their books eventually. Customers will grow their business with normalcy returning over a period. Even the government and Ministry of Finance can assist in the awareness creation by methods normally deployed to communicate the benefits of the reform.

 The reform will be effective, if we have a large number of eligible borrowers seeking benefit. Therefore, it should be evaluated based on the number of beneficiaries, rather than the total amount of relief sought.

The writer is managing partner, Ashvin Parekh Advisory Services LLP. Views are personal