M K Verma
Mumbai : On April 17, 2020, RBI Governor Shaktikanta Das announced landmark measures to help Banks and NBFCs cope up with the COVID -19. His announcement included- 1. infusion of funds through second dose of Targeted Long term Repo Operation ( TLTRO2.0), 2. Extension of NPA classification norms from 90 days to 180 days for standard Assets, 3. Reduction in Reverse Repo Rate by 0.25% basis point & 4. Extension of special finance facilities of Rs 50000 Crs to NABARD, SIDBI and NHB to meet sectoral credit needs.
Undoubtedly, the revival package announced aims at maintaining adequate liquidity in the system, facilitating bank credit flow and easing the overall financial stress but the motivation among the credit sanctioning authorities at the banks and NBFCs is lacking due to standardised credit appraisal method and the prevalent fear psychosis.
The lenders need to be receptive to the current business requirement and accordingly bring changes in the traditional lending parameters and norms for a period of two years at least to allow the borrowers benefit from the recently announced relief package.
It is evident that post the lockdown, the industries will be facing acute shortage of working capital funds due to the inability to operate at full scale for months. Also, their reserves would have been depleted in providing salaries, making maintenance and statutory payments in order to avoid closure of units. The lenders should be mindful of these issues while making lending decisions.
Changes required in credit assessment and appraisal :
1. While doing the Credit Appraisal before lending, the Banks and NBFC analyses the existing Balance sheet based on various ratios and set parameters The concern is in the current situation, if the lending institution expect the borrowers to maintain the standard cut offs (ex. D/E = 2:1), it will be very difficult for them to qualify. Be it for Term Loan or Working Capital requirement. It is, therefore, required that the traditional Appraisal system be amended to evaluate the credit worthiness based on estimations of future cash flow.
2. Funding based on 80% or 75% collateral should not be insisted by the lenders. Rather a prudent parameter of 50% or 40% should be considered if the Cash Flow is assured. RBI has advised the Banks to lend based on Cash flow rather than collateral, but the same is not being adopted by the Banks.
3. At present, the assessment of working capital finance requires the promoter /company to bring margin of 25% of the total exposure. In post lockdown scenario since the existing reserves of the firm would be depleted to a great extent, it will be very difficult for the promoters to arrange 25% margin. The 25% margin requirement for availing Term Loan / Working Capital needs to be minimised to 5% till the time they regain their normal functioning status within a year.
4. Presently, one of the primary requisites for availing credit from a bank or NBFCs is meeting the CIBIL score cut-off of 700. Failing which, the institution rejects the application even if the projected cash flow is assured in the future. The Banks are neither willing to extend Bill Discounting facility nor Working Capital facility to such units. This needs to be reviewed and lending Institutions should be advised by the Regulators to extend credit facility even if CIBIL Score is low subject to the confirmation of assured future cash flow. Another resort for the safeguard of the lenders interest is the creation of Escrow Account, which allows the banks to have primary access over the sale proceeds. Only after the bank deducts its installment, the remaining funds are made available to the units.
5. The NPA classification criteria for standard Assets being extended from 90 days to 180 days is appreciable. The MSME and smaller firms would require a longer tenure to reach the level of cash flow that would enable them in servicing their installment/interest regularly. An extension of NPA Classification of 270 Days as one time measure should be considered for firms that had been regular on their payments prior to the nationwide lockdown.
6.The recent circular to give an option to defer the interest/installment for 3 months for term loans and 10% additional ad-hoc limit will not be sufficient for Working Capital requirement and will not be sufficient for the MSMEs to come out of this critical situation. An additional limit, capped at 25% would be more rational.
7. The prevailing fear psychosis amongst lenders about the account turning into an NPA, and facing the vigilance enquiry should be removed from the credit assessor’s mind. A proper framework should be designed which includes a SWOT and PESTEL analysis in the Credit Appraisal process.
( The writer is Director, Moneyy Maxx Finance Services Pvt. Ltd, Mumbai., Maharashtra)