Allow cos to capitalise Covid losses: Deloitte

TNN

Mumbai: With the three-month moratorium on

loans

expiring May-end, businesses whose top line has been hit because of the Covid-19

lockdown

risk defaulting on their loans, and consequently becoming ineligible for credit. To avoid a logjam and to ensure businesses remain functional, industry body

Ficci

and

Deloitte

have suggested a two-step restructuring. In the first step, the losses for the quarter are capitalised and moved to the balance sheet and, in the second, banks provide a ‘crisis liquidity bridge’ with a credit guarantee from the government.

According to

Deloitte India

partner Sumit Khanna, because of the ongoing

Covid-19

crisis and lockdown, most businesses’ revenues are seriously impaired, some have had no revenues at all, while a few like telecom are doing better. Borrowers whose cashflows have been seriously impaired may default either by not meeting loan obligations or breaching loan covenants, forcing lenders to recall their loans.

“The redeeming feature of the proposal is that the government does not undertake any fund outflow upfront. The government is only required to provide guarantee on bank loans based on an assessment by lending banks, guided by parameters set by the RBI. While there may be defaults despite continuous and rigorous monitoring, they are expected to be contained within 10%, necessitating support of Rs 30,000-40,000 crore to banks over 5 years by the government,” said Khanna.

He said that the losses can be capitalised by showing the excess of costs over revenue for the lockdown quarter as an investment under ‘Covid crisis investment’ in the balance sheet. This can be amortised over five years. “Businesses are invested in the battle against

Covid

. If businesses do not make revenue, the government will not make revenue — through goods and services tax or income tax. Moreover, there is a large ecosystem comprising entities that are upstream and downstream that are impacted,” he said, explaining the need to ensure that businesses do not shut down.

To address the liquidity issue, the report by Deloitte and Ficci recommends that banks can disburse additional funds to the extent of costs that have been capitalised in the form of a ‘crisis liquidity bridge’, possibly with a one-time restructuring of existing liabilities.

To ascertain whether the business will be in a position to repay, Deloitte recommends the framework provided under RBI’s June 2019 circular for dealing with stressed companies. The circular requires the business plan to be approved by two external rating agencies. This reduces the chances that lenders are throwing good money after bad. According to Khanna, even if 5% of the loans go bad, it will be cheaper for the government than providing a direct financing package.


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