A second restructuring of loans is a crying need for many manufacturers today.

BL:S Adikesavan:28 Mar 2012

How worse can it get before things start looking up for India's stressed manufacturing sector?

Last week, Gurusamy (name changed to protect identity), a 61-year-old spinning mill owner from Salem, was in tears as he spoke of the cash losses his company was incurring. “I have reached the end of my tether. I am worried that I may default on my bank loans, which has never happened to me for the last 30 years, Sir. And, I haven't been able to sleep or eat properly for the last six months,” he told me in between sobs.

A customer with our bank for more than 30 years, with a demonstrated record of repayment, Gurusamy was hit hard last year by the volatility in the prices of cotton, his raw material. The price of cotton, which he bought and stocked at approximately Rs 62,000 per candy (356 kg), came crashing down to Rs 33,000 in approximately three months. This year has been even worse, with his own end-product, yarn, not fetching remunerative prices. The drastic power shutdowns in Tamil Nadu have dealt an additional blow.

The text-book credit solution in such cases would be a repayment holiday till the stressed company generates cash profits, so that the debt overhang doesn't bring the curtains down on Gurusamy's unit. But doing so would also make his account a Non-Performing Asset (NPA). This is a dubious tag a conscientious entrepreneur like Gurusamy doesn't want.

Gurusamy's loan accounts had been restructured once in the past, in the aftermath of the 2008 global economic crisis. Following that restructuring, which involved a deferral of his term loan instalments, he promptly resumed repayment, as the business began generating cash surpluses. This continued right until the second half of 2011, when things started going wrong again. A second restructuring now would lead to a ‘downgrading' of the asset, as per the Reserve Bank of India (RBI) regulatory guidelines. Damned if you go for another restructuring, damned if you don't!

MANY GURUSAMYS

Across India, there are hundreds of borrowers like Gurusamy in sectors such as textiles, steel or sugar, caught in a bind after their accounts have already been restructured once. Under the RBI norms, a second restructuring will doom them to the NPA dustbin, which no genuine borrower (or lender) desires. They will then be blacklisted and clubbed along with other defaulters, who have diverted funds outside their businesses. All that borrowers such as Gurusamy are seeking is a reprieve from making payments, not a debt waiver.

The present times are extraordinary, indeed. The global economy is in turmoil again, as demand from Europe — a major export market for India — is down, interest costs have risen by nearly 30 per cent following the staccato hikes in the RBI's repo rates in the last one year, and the domestic economy itself is slowing.

Last month, one of India's largest integrated textile manufacturers, with a Rs 6,000-crore-plus turnover, announced a quarterly loss for end-December, for the first time in its history. This holds good even for a steel major, which posted a loss of Rs 262 crore, on a turnover of more than Rs 25,000 crore, as against a profit of Rs 960 crore for this quarter last year. The mood is clearly downbeat. In States such as Karnataka, mining bans have led to a freeze in iron ore supplies for medium-scale steel units. When there is no raw material, what are manufacturing units supposed to do? How can they even pay salaries, leave alone paying lenders?

To compound their woes, in many States, the power sector has been in the doldrums, with no coal or gas, and the distribution utilities themselves have no money to buy from generating stations. So, there are power shutdowns, both official as well as unofficial. In Tamil Nadu, for instance, there is a ‘power holiday' for eight days in a month, and restricted supply on some other days for industrial consumers. It would probably be no different in the remaining States.

TRYING ENVIRONMENT

The problems listed are real. Also, they are akin to ‘environmental' problems, unrelated to or abnormal in the context of businesses that these borrowers are in.

From a lenders' perspective too, there is a crying need for a ‘special dispensation' for restructuring of debts for such borrowers. This is because these issues are ‘special', lying outside the domain of both lender and borrower.

There is no way lenders can raise demand for repayment, when there is no internal cash generation in the first place. It is a typical Catch-22 situation that can be unravelled only through decisive regulatory intervention.

The RBI has itself, in the recent past, shown the way out — not once, but twice. In 2008, it brought in a special dispensation providing for a second restructuring, if required. The RBI guidelines of December 8, 2008, and January 2, 2009, were precisely a response to the spill-over effects of the global downturn.

“We reiterate that the basic purpose of restructuring is to preserve economic value of units, not evergreening of problem accounts,” the RBI noted then, while urging banks to undertake a careful assessment of viability, quick detection of weaknesses, and a time-bound implementation of restructuring packages.

Again, in 2011, when the Andhra Pradesh government issued an ordinance, clamping down on the excesses of micro-finance institutions that led to recovery problems, the RBI allowed one-time restructuring of bank loans to these institutions without affecting their asset status (The RBI norms, in the normal course, permit only the asset-status of industrial units to be maintained as ‘standard', after restructuring).

RESTRUCTURING WITHOUT NPA

In order that such a provision is not misused, the RBI can restrict the proposed ‘special dispensation' facility only to units that have long-term viability, have an established record of payments, and not resorted to diversion/siphoning off funds, and can bring in additional promoter's contribution. There can further be a special time-bound external audit to attest to these facts.

This facility is necessary more for mid-corporates and units with a turnover of up to say, Rs 500 crore. The bigger players and the mega-corporates generally ‘know' better how to take care of themselves, and also tap the right people for this purpose.

In this former case, at stake are not merely a few loans becoming NPAs. All these companies provide employment to thousands of families. Gurusamy's unit alone employs some 500 workers. We have precedents that show a second-restructuring provision is an acceptable solution to assist such businesses in distress for no direct fault of theirs.

In matters of monetary policy, the regulatory authority always likes being ‘ahead of the curve'. The current dire milieu calls for a similar imaginative ‘ahead-of-the-curve' approach on RBI's part.

A second-restructuring, special dispensation package for units facing stress due to ‘environmental reasons' is the minimum that ‘policy' can do to prepare borrower-entrepreneurs like Gurusamy survive trying times.

Else, as Benjamin Franklin once said, “By failing to 

prepare, we may be preparing to fail”.

(The writer is with State Bank of Mysore. Views expressed are personal.)