Don’t burden taxpayers and depositors for business failures
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Synopsis
The government came up with subsidies and schemes to help the small businesses get access to funds and suspended a law that might have led to some losing their assets for defaulting on payments.
Hardly anyone is left without being disturbed one way or the other because of the Covid-19 pandemic. The impact is so wide that everyone — from elementary-school kids to the country’s Prime Minister — had to rework the way they functioned.
Businesses are no exceptions. With nearly five months of the shutdown and a total sales washout for many industries, no sane person could expect it to be business as usual. The role of the state is to help its citizens fight this act of god.
The state and regulators stepped in with numerous measures to help businesses face unprecedented challenges to survival. The Reserve Bank of India slashed interest rates to record lows, made funds available easily and provided a six-month moratorium that eased payment worries.
The government came up with subsidies and schemes to help the small businesses get access to funds and suspended a law that might have led to some losing their assets for defaulting on payments.
As the nation crawls back to normalcy, so should businesses. Life is not going to be the same again as peoples’ behaviour and consumption patterns change. But one thing wouldn’t — depositors expecting their money back in full.
Recognising the practical difficulties, the RBI permitted banks to provide easier norms for borrowers affected due to lockdown known as ‘loan restructuring’ but barred those who missed payments before that.
But as normalcy unfolds, some businesses which were struggling even before Covid and missed payments in January and February are demanding that they should not be classified as defaulters citing Covid-19. If they were doing good, they wouldn’t have failed to pay. The Supreme Court would resume hearing on the issue on September 10.
This is more an escape route that could prove costly for the economy than nurture businesses back to life. It is almost certain that the hotel and travel business would be the worst hit.
If ABC Restaurants failed to pay in January and February, it was because it did not generate enough revenues. Lack of competitiveness or wrong location may have been the reason than the lockdown. Not declaring ABC a defaulter and restructuring its loans would do no good because, after the pandemic, its revenues would be even lower, making survival difficult.
If XYZ Restaurants was prompt in payments until February and it seeks a restructuring after Covid, it is justifiable because even with lesser footfalls, it may still be profitable — although that’s not assured.
No banker wants to see his client default. It is in his interest to ensure that businesses survive because his remuneration is linked to his clients’ survival. But at the same time, he alone can recognise whether a business can survive, and accordingly, initiate action to recover the dues. No two businesses are the same and that’s why the RBI has empowered the banks to decide on loan restructuring instead of a formula.
The banker’s obligations to depositors — including teachers, policemen, bureaucrats and even judges — is more than to the borrower because it is the depositor who is the cornerstone of the banking system and not the borrower.
History shows that delay in recognition of stress and recovery erodes value substantially. Average recovery from defaulters for 15-years between 2004 and 2019 has been between 2.4% and 21.5% of the book value that banks had assigned, RBI data showed. Only in one year — 2010 — it was above 20%.
Who bears the losses? Given that more than two-thirds of the industry is state-owned, it is the government. The government invested about ₹3 lakh crore of taxpayer money in the past few years to keep the banks afloat.
Yet another issue is interest on interest during the moratorium period. It’s being painted as if Shylocks are wandering around slicing away pounds of flesh. The truth is that inanimate banks don’t lend, but living depositors. If borrowers don’t pay, can banks suspend interest for depositors? The consequences of such an action for banking and economy would be far worse than years of lockdown.
Corporate frauds and defaults led to the banks incurring a loss of ₹32,438 crore in fiscal 2018, data from the RBI showed. In fiscal 2019, the aggregate loss was ₹23,397 crore.
Can the government fund the losses of business once again in the name of Covid-19? Its finances are worse than many borrowers. Its fiscal deficit is set to soar. States are demanding the central government fund the shortfall in GST collection. Looking at the state of government, investors who were lending to the central government at 5.75% two months ago started demanding 6.2%.
It would be the classic case of privatising profit and socialising the losses if failing businesses were kept alive and interest dues are waived. After all, it is the teacher, policemen, judges and doctors who would be paying more taxes to fund the bank losses. Don’t hang the taxpayer in the name of being sympathetic to entrepreneurs. It is the taxpayer who deserves sympathy, not the inept entrepreneurs.
Businesses are no exceptions. With nearly five months of the shutdown and a total sales washout for many industries, no sane person could expect it to be business as usual. The role of the state is to help its citizens fight this act of god.
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The state and regulators stepped in with numerous measures to help businesses face unprecedented challenges to survival. The Reserve Bank of India slashed interest rates to record lows, made funds available easily and provided a six-month moratorium that eased payment worries.
The government came up with subsidies and schemes to help the small businesses get access to funds and suspended a law that might have led to some losing their assets for defaulting on payments.
ADVERTISEMENT
As the nation crawls back to normalcy, so should businesses. Life is not going to be the same again as peoples’ behaviour and consumption patterns change. But one thing wouldn’t — depositors expecting their money back in full.
Recognising the practical difficulties, the RBI permitted banks to provide easier norms for borrowers affected due to lockdown known as ‘loan restructuring’ but barred those who missed payments before that.
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But as normalcy unfolds, some businesses which were struggling even before Covid and missed payments in January and February are demanding that they should not be classified as defaulters citing Covid-19. If they were doing good, they wouldn’t have failed to pay. The Supreme Court would resume hearing on the issue on September 10.
This is more an escape route that could prove costly for the economy than nurture businesses back to life. It is almost certain that the hotel and travel business would be the worst hit.
ADVERTISEMENT
If ABC Restaurants failed to pay in January and February, it was because it did not generate enough revenues. Lack of competitiveness or wrong location may have been the reason than the lockdown. Not declaring ABC a defaulter and restructuring its loans would do no good because, after the pandemic, its revenues would be even lower, making survival difficult.
If XYZ Restaurants was prompt in payments until February and it seeks a restructuring after Covid, it is justifiable because even with lesser footfalls, it may still be profitable — although that’s not assured.
No banker wants to see his client default. It is in his interest to ensure that businesses survive because his remuneration is linked to his clients’ survival. But at the same time, he alone can recognise whether a business can survive, and accordingly, initiate action to recover the dues. No two businesses are the same and that’s why the RBI has empowered the banks to decide on loan restructuring instead of a formula.
The banker’s obligations to depositors — including teachers, policemen, bureaucrats and even judges — is more than to the borrower because it is the depositor who is the cornerstone of the banking system and not the borrower.
History shows that delay in recognition of stress and recovery erodes value substantially. Average recovery from defaulters for 15-years between 2004 and 2019 has been between 2.4% and 21.5% of the book value that banks had assigned, RBI data showed. Only in one year — 2010 — it was above 20%.
Who bears the losses? Given that more than two-thirds of the industry is state-owned, it is the government. The government invested about ₹3 lakh crore of taxpayer money in the past few years to keep the banks afloat.
Yet another issue is interest on interest during the moratorium period. It’s being painted as if Shylocks are wandering around slicing away pounds of flesh. The truth is that inanimate banks don’t lend, but living depositors. If borrowers don’t pay, can banks suspend interest for depositors? The consequences of such an action for banking and economy would be far worse than years of lockdown.
Corporate frauds and defaults led to the banks incurring a loss of ₹32,438 crore in fiscal 2018, data from the RBI showed. In fiscal 2019, the aggregate loss was ₹23,397 crore.
Can the government fund the losses of business once again in the name of Covid-19? Its finances are worse than many borrowers. Its fiscal deficit is set to soar. States are demanding the central government fund the shortfall in GST collection. Looking at the state of government, investors who were lending to the central government at 5.75% two months ago started demanding 6.2%.
It would be the classic case of privatising profit and socialising the losses if failing businesses were kept alive and interest dues are waived. After all, it is the teacher, policemen, judges and doctors who would be paying more taxes to fund the bank losses. Don’t hang the taxpayer in the name of being sympathetic to entrepreneurs. It is the taxpayer who deserves sympathy, not the inept entrepreneurs.
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