The expert committee on resolution of Covid-19 related stressed assets has brought out a rather cogent report, which identifies the sectors to be included as well as the parameters that would set the perimeter for inclusion. What is significant is that the approach is differentiated across sectors. It is not a case of one size fits all, which would have skewed the picture. The report has identified 26 sectors to be included and uses five indicators, which include representation for leverage, liquidity and debt servicing.
The other contours in terms of eligibility has already been notified by the Reserve Bank of India (RBI) in terms of their position before the Covid-19 pandemic struck. The Committee must be complimented for the timely delivery of this charter, and it would now be left to the banks to ensure that the other timelines are adhered to as well.
One of the basis of selection of sectors would have presumably been the outstanding debt as well as number of individual exposures beyond the threshold levels. The two sectors that have probably been affected the most by the shutdown are entertainment and media, which probably comes under the discretionary heading of others. Making the chart comprehensive covering all sectors may not have been relevant presently, given the other criteria being used for selection, but could serve as valuable signposts for future. That’s because this framework can be replicated for future non-Covid-19 action, too, as such cycles cannot be ruled out in future.
That said, the exclusion of non-bank finance companies (NBFCs) is interesting, as this is sector is heavily leveraged and could face the same problem as banks from their clients. A separate dispensation for them could have been suggested to make things clearer. It will also be interesting to see if NBFCs use the same yardsticks when looking at their asset portfolio for restructuring.
However, the indicators chosen are appropriate and will help bring the fine tuning that is required when differentiating across sectors. A further screening system could have specified the parameters by size of debt, which would have been useful for the lenders to distinguish between ticket sizes. Ideally, a larger ticket size would require more stringent parameters as the threat of non-performing assets (NPA) will be higher in volume terms. These thresholds, nevertheless, would serve good starting points for the lenders while taking a decision.
The indicators chosen are more on debt and liquidity-driven, which are the prime drivers of any restructuring exercise. Could the Committee have looked at some forward looking indicators? That would have been interesting as all these sectors have different periods of recovery. While companies in the manufacturing sector would tend to recover earlier, services will be handicapped to the extent that their opening up is contingent on the social distancing norms that have to be maintained. A hierarchy of pecking order of selecting industries is something that the lenders may further like to examine. It is here the growth prospects of various industries could be looked at. In this context another filter that could have been considered is the extent to which the other sectors have been affected by Covid-19. Pharma and retail, for example, have had fewer disruptions compared non-essential goods.
While these criterion can be considered later, the present framework is quite comprehensive and helps kick-start the entire process. The recommendations are a good start for resolving a big problem.
Madan Sabnavis is Chief Economist at CARE Ratings. Views are personal.