The slow-balisation of economies on the pretext of COVID-19 has adversely impacted credit delivery and asset prices depressing the flow of capital across sectors. In times where banks and financial institutions such as NBFCs, HFCs, and MFIs are under twin-pressure of recovery while offering credit relaxations, the resilience of the sector is put through a litmus test!

Banks wrote off over ₹80,000 crore of loans in the first half of FY2020. The number exceeded ₹2 trillion in the past two years. But major Indian banks have demonstrated resilience through uninterrupted services, offering EMI moratoriums or fee waivers to borrowers. Unfortunately, historic trends alludes a grim scenario where Indian financial institutions were resigned to overlook defaults thereby leading to grave profitability concerns and credit risks associated with it in the wake of the COVID-19 pandemic.

Creditors can approach a wide array of courts and tribunals each governed by a different legislation to recover their monies. The cobweb of legislations has an adverse impact on the recovery front for financial institutions like banks and NBFCs alike. For instance, despite filing an application under the Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI Act), defaulters found ways to stay these proceedings from any court, including labour courts. As a result, financial institutions are compelled to rush to that court and get the stay vacated. Moreso, even the Insolvency and Bankruptcy Code, 2016 (IBC) failed to notch up recoveries, barring a few landmark cases. IBC may have resulted in many promoters being ousted from their companies owing to non-repayment of loans. But banks are yet to ratchet up their risk-management practices to assess and price loans. Furthermore, the IBC Code is designed to put a stay on all civil proceedings against the Corporate Debtor upon the commencement of the Corporate Insolvency Resolution Process at the appropriate Tribunal. Although this framework empowers the IBC Code, it simultaneously trivializes and ousts other remedies made available to creditors under the law.

Further, the 6-month blanket suspension of fresh initiation of insolvency cases under Sections 7, 9, and 10 of IBC coupled with increase in minimum threshold to Rs. 1 crore aggravates the problem of recovery of monies. While this move limits frivolous litigation, reduces the burden on judiciary and insulates companies suffering in the pretext of COVID-19, it has deleterious consequences on lenders having outstanding debts less than Rs. 1 crore. As a result, markets may witness a spike in frauds with debtors trying to get away without repayment on the grounds of challenges posed by COVID-19. Suspension of the IBC for a time of a half year will additionally debilitate the lenders from starting insolvency resolution procedures against the corporate debtors, in this manner further hindering the system to resolve the debt and recuperate the credit. Undeniably, this suspension will place the banks in desperate monetary emergency, as in spite of easing of the lockdown, they will stay remediless for in any event a time of at least a half year, simply after which they may look for redressal under the IBC, which will additionally take 330 days to recoup the credit from the corporate debtors.

Recently, it was clarified that the 6-month blanket ban will be applicable to Nono-Performing Assets after March 25. While this move offers relief to battered companies, this decision is a nightmare for the banking sector as banks will be forced to sit on bad assets for a longer duration thereby leading to future stress and lower realization through the resolution process.

Furthermore, the Finance Ministry's economic relief packages along with RBI's 6-month EMI Moratorium upto 31st August 2020 on loans is aimed to provide fiscal stimulus and liquidity to businesses, especially MSMEs in the lowest rung of the pyramid – who borrow not from banks, but NBFCs, HFCs, and MFIs to support their operational or expansion plans. Collectively, these measures are likely to abate a wave of colossal loan defaults and jumpstart production and sales, but its effectiveness can be gauged only after lifting of lockdown when the economy gains traction and businesses attempt to avail the benefits to boost India's supply side with a hope to ultimately push the demand side upward. Today, while most of the asset quality issues in the Indian banking industry are a reflection of the macroeconomic situation, too much emphasis on just big ticket lending to build balance sheets will lead to concentration of lending to fewer companies with stronger core asset value. Meanwhile, financial institutions will be expected to demonstrate resilience by offering relaxations to borrowers whilst maintaining a strong intrinsic value of the bank itself.

As financial institutions are spread thin, the government's protectionist stance on its FDI and FPI policies have further scraped the wounds of the ailing banking sector. Though restrictions on foreign investments through the automatic route implicitly protect Indian businesses from opportunistic takeovers by their Chinese counterparts, it places the capital-bait farther away. In light of these amendments, several cash-strapped players from the banking and NBFC sectors will have limited foreign investors at hand and will be left scrambling for money during the economic downturn. Thus, such restrictive policies will compel banks and FIs to aggressively seek alternative foreign investors to meet their business objectives of – survival, growth, expansion or otherwise.

The list of challenges doesn't end here. The currently dysfunctional and overburdened judiciary, implies that banks and financial institutions must do away the traditional litigations and embrace myriad forms of Alternative Dispute Resolution (ADR) such as – arbitration, mediation, conciliation, judicial settlement, judicial settlement through lok adalat (people's court) as prescribed by the Civil Procedure Code under Sec. 89(1)–(2). This is especially useful in times of social distancing as Online Dispute Resolution (ODR) mechanisms delivers justice through your computer screens. However, this road to resolution is still riddled with challenges due to lack of robust infrastructure to conduct ODR meetings like strong and stable internet connectivity, and IT support to resolve technical anomalies. Second, lawyers, mediators, judges and other parties to the dispute may not possess adequate knowledge of computers and softwares to participate in an ODR meeting. ODR can help overcome jurisdictional issues, eliminate geographical barriers, automate administrative tasks, improve productivity of professionals, promote eco-friendly processes, and finally, deliver a quick, economical and effective solution to disputes. As a result, financial institutions are likely to embrace ODR now more than ever before to realize monies and stay afloat during depressionary forces.

The impact of COVID-19 flare-up relies upon the gravity, degree and dissemination of the cataclysm, which remains uncertain even today. Government mandated moratorium and relaxations must be afforded but banks and FIs will be posed with a challenge to elevate their balance sheets without falling into an abyss of liquidations, bankruptcy and vicious litigations. Relief packages intended to revive the supply side of the economy will compel financial institutions to take massive haircuts and opt for out-of-settlements and ODR mechanisms to recover monies in a cash-strapped economy. 

While the government works on revamping its judicial framework, the banking sector should concentrate on its business continuity plans, assess and adopt prudent risk management strategies and build resilient workplace systems and culture. In the interim, banks, NBFCs, HFCs, and MFIs are required to exhibit resilience by offering government-mandated relaxation to borrowers on one hand whilst maintaining its balance sheet buoyancy on the other! As the banking sector tip-toes to circumvent the COVID-19 quicksand, timely if not speedy resolutions will play a key role in helping them rise from ashes!

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