Tuesday, December 15, 2015

Debt and Disaster

Disasters may be frequenting the coastal regions. But not like the one that we saw in Chennai till yesterday, in the recent history. It may take months for the city to recover from the shock and may need billions of rupees for recovering the lost infrastructure and assets. This signifies that no disaster will be like its predecessors and they manage us and not us managing them.

The estimate for the insurance sector outflow for the rescue has been put at a measly Rs.500cr.  It may have excluded the assets insured in the financial sector. Several industries, export-oriented auto components industry, leather industry, several MSMEs alone have assets worth around Rs.2lakh crores in and around Chennai, the marooned metro for a century.

There are 1327 commercial bank branches in Chennai alone as at the end of March 2015. They hold advances of nearly Rs.1lakh crores. Several houses are in rubles.

The real estate loss is no less. Even as the infrastructure like roads, drainage, sewerage systems, drinking water are brought to normalcy, simultaneously tackling the health and hygiene, financial sector has to gear up faster than others.

On the 18th December the 144th SLBC is scheduled to meet. By the time it meets the banks should come to a rough assessment of the losses their clients suffered; the loss their own infrastructure suffered; the extent to which insurance claims can be recovered; resurrection of the ATMs and several POS machines at the retail outlets like the gas stations, consumer stores like the Reliance, Spencers, Big Bazars, Jewelers shops etc.

RBI guidelines on rescheduling and restructuring of loans issued in July 2015 take care of the agricultural credit and micro credit affected by such natural calamities. But one important guideline is that the SLBC may constitute special task forces to assess the damage to their own assets and the assets financed by the banks and declassify all the NPAs to facilitate restructuring. In regard to the MSME sector the guidelines are not comprehensive. In addition SLBC should take a call on the conditions under which certain loans could be written off where any restructuring may not be of help to the unit.

SLBC may have to also take a call on enlarging the discretionary powers of the local managers and online reporting system for such decisions so that expeditious clearance of rehabilitation proposals would be set in motion.

Several MSMEs have manifold responsibilities of rehabilitating their workers along with restructuring their financial assets that may involve even rebuilding their lost sheds and repurchasing their lost machinery.

Term loans for repairs to and renovation of factory buildings/sheds and machinery as also for replacement of damaged parts and working capital for purchase of raw materials and stores will need to be provided urgently. While doing so, the banks may have to waive off all the interest and installment dues totally.

Where the raw materials or finished goods have been washed away or ruined or damaged, banks’ security for working capital will naturally be eroded and the working capital account (Cash Credit or Loan) will be out of order. In such cases, banks will convert drawings in excess of the value of security into a fixed term loan and also provide further working capital to the borrower on liberal terms. Banks should not insist on any collateral security for rehabilitating the unit. The gestation should be at least six months.

Depending on the damage suffered and time needed for rehabilitation and restarting production and sales, term loan installments will have to be suitably rescheduled, keeping in view the income generating capacity of the unit.

Shortfall in margins will have to be condoned or even waived and borrower should be allowed time to build up margin gradually from his future cash generation.

In respect of advances guaranteed by the CGTMSE the banks concerned should claim from the guarantee organization the eligible amount of advance outstanding with recourse to covering the future advances to the unit as if it is a fresh loan. The existing guidelines of the CGTMSE do not contain any provisions for such cover. Hence there is need for taking an urgent call on this.

Rate of interest on all the restructured loans should be 2 percent below the existing lending rate of all advances.

Recall what Kautilya said in his Arthasastra: “Calamities due to acts of are: fire, floods, diseases, epidemics and famine (8.4.1). Whenever danger threatens, the King shall protect all those afflicted like a father (protects his children) and shall organize continuous 9day and night) prayers an oblations.(4.3,.42)

The collective thinking of SLBC should be out-of-the-box and should go with the state government in bringing back Chennai to its normalcy.