End of loan vacation threatens pain, defaults for Indian businesses

Small businesses in India, already struggling amid the pandemic, now have to repay growing debt after a loan holiday ended last month.

The Reserve Bank of India granted borrowers a six-month freeze on their loan repayments, which ended on August 31, with about a third of India’s $ 1.8 trillion in outstanding loans being deferred in the program framework. Businesses still trying to cope with a collapse in demand now have to find a way to pay off their loans or face closure.

This is a dilemma that Regi Philip faces. He has a travel agency in Mumbai, which has been out of business since April, when the country entered detention. He got a temporary reprieve from his bank, helping him save ??4.5 million ($ 61,000) per month in debt repayment. He is worried about how he will resume these payments, given that his travel business has yet to recover and he still has salaries and other overhead to pay.

“The Reserve Bank should ask the banks to extend the moratorium,” said Philip, managing director of Cosmos Agencies LLP.

The central bank has given borrowers some relief by allowing banks to extend the moratorium and restructure loans, but the process is not automatic. Lenders can grant extensions of up to two years and have until the end of the year to choose which loans to recast and until June 2021 to do so.

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Pandemic stress (Graphic: Bloomberg)

Prime Minister Narendra Modi’s government has also set up an expert panel to assess the waiver of interest on loans frozen until August 31, which amounts to up to Rs 2 trillion.

But for many small businesses, which account for around 30% of India’s economy, the relief won’t be enough. About 17.5 million stores, representing a quarter of small businesses, are set to close due to a lack of financial support from the government, according to the Confederation of All Indian Traders.

“The next level of stress for the economy is likely to emerge,” said Kunal Kundu, economist at Societe Generale GSC Pvt. in Bengaluru. “Many of those organizations that have barely managed to stay afloat thanks to the proposed moratorium will inevitably go bankrupt, reducing employment levels and aggregate demand.”

The economy’s 23.9% contraction in the last quarter was the worst on record and the largest of any major economy that Bloomberg tracks. Consumption, which accounts for around 60% of gross domestic product, has been severely affected after millions of Indians lost their jobs during the lockdown. The recovery has been slow and an upsurge in cases of the virus has led many economists to downgrade their growth forecasts even further.

Withhold payments

Banks oppose the extension of the freeze on loan repayments because they see it as a strain on their finances and an opportunity for borrowers – who have the capacity to repay – to suspend their payments.

Bad loans mess

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Bad loans mess (Graphic: Bloomberg)

About 75% of the companies that opted for the moratorium were below investment grade, according to an analysis of 2,300 companies by Crisil Ltd., the local unit of S&P Global Ratings. In industries such as gems and jewelry, hotels and car dealerships, one in five companies have requested the moratorium, he said.

“We are looking at a potential collapse scenario for our business if we do not get any reprieve from the government,” said Ashokan Puthenpurackal, general manager of Antech Offshore Engineering Pvt. in Mumbai. “We are completely empty on the future for the simple reason that business has not yet taken off.”

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