At the start, it has to be said that this principle itself is a welcome revolution, a much-needed cleansing of their banking system and its nexus with corporate India. For too long now, there’s been enormous opacity in regard to the number of companies are paying back their loans leading to the present accumulation of Non-performing assets (NPAs) or nonperforming loans with banks. Had this rule been set in the novels in 2010 or 2012, this kind of accumulation of NPAs might not have come to pass.

Additionally, there are individuals who believe that thanks to this AQR or the strength quality review by Reserve Bank of India in 2015, the majority of the big NPAs or defaults are well and widely known and therefore starting October, nothing new is going to be shown which will rattle the stock markets.

Additionally, there are other people who believe that like the GST, there will be temporary disruptions, but things will settle down since individuals who default by a couple of days pay back as well as the brand new disclosure reassures markets.

The fact is most bankers, rating agencies, brokerages and companies are uncertain how this will perform and a few are terribly worried.

This is why.

Bankers state non-refundable of interest to banks even by a day may direct rating agencies to immediately downgrade the lender facilities of the companies to “D”. Bank loans to companies graded “D” in turn will need to be encouraged with higher risk capital. Given that banks are already facing the possibility of large demand for capital to fulfill NPA and insolvency cases, this new snowball can extend them.

What is worse, when a business is graded “D”, banks might even be unwilling to give them new loans since even these will bring higher risk capital. Hence, what might be a couple of days’ default option for a few innocuous reason might lead to stoppage of credit and thus stoppage of production for a longish period.

Exporters have not obtained their Integrated GST (IGST) credits in the government since the system is still not completely functional.

With the money situation already tight, the Odds of hundreds even Tens of thousands of companies defaulting with a couple of days is extremely likely. And if their lender facilities are immediately rated “D” by the rating agencies, and also the banks consequently refuse to give additional credit, many companies can go out of business temporarily. Like underneath demonetization and GST, some cannot possess the buffer to stay place and may go out of business indefinitely.

It is possible things might not perform so poorly. Companies may borrow in their collection companies and associates and avoid default, knowing that the outcomes. In several circumstances, it might just be a situation of disciplining money flows to cover on the 29th day, unlike the recent procedures which are designed to cover on the 89th day.

Additionally, some experts say the majority of the loans in India are given by banks on a money credit basis, and also the threat of default in these instances is reduced since companies seldom borrow up to their limit.

Some also Argue that the majority of the worried companies are currently in SMA1 or SMA2 class. (SMA is special mention class; SMA1 comprises loans in which interest hasn’t been paid within 30 days, and SMA2 are people where interest is finished due by over 60 days). Banks are already aware of those.

Starting October, they say, many banks can grow to be even more reluctant to lending, and also the aversion will begin even as the “active” period for business begins. In addition, companies hardly recovering from demonetization and GST might be not able to survive in the surface of the fresh squeeze on capital.

All this might not occur, but maybe the regulators — both SEBI and RBI — want to call bankers and rating agencies and contemplate over the way the rule might be really implemented without killing the spirit of the principle or the businesses.


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