SBI seeks loan guarantees, extension of moratorium

State Bank of India‘s Chairman Rajnish Kumar has sought government guarantees to enable banks to lend to companies to expedite a post-lockdown economic recovery in the aftermath of the Covid-19 pandemic. Addressing a webinar by Naredco, Kumar said banks can play a critical role of intermediation by lending to corporates if the government provides them with the risk capital or extends guarantees against corporate loan defaults and the RBI gives them liquidity support for the purpose.

In his address, Kumar underlined the need to extend the moratorium on repayment of loan to six months depending on evolving the situation from the existing three months. He said lenders, through the Indian Banks’ Association, will request for raising the loan moratorium period. Kumar said risk capital to enable banks to extend loans to corporates is the best way to go forward as banks have limited risk appetite despite their financial position having improved over the last three years. “Even if the government guarantees the incremental lending, that will be of much help.”

Kumar said that the economy needs support at multiple levels. First at the macro level to address the entire economy. Then at sector level to address most affected industries like transport, hotel, restaurants and others, and finally at micro level to address the problems faced by a specific unit. “The banking system and public sector banks can play a critical role and the government needs to support them by providing them with the risk capital. Whether it is direct or through the guarantee route and how much obligation government can take are the subject matter of deliberation and discussion.”

A lockdown following the coronavirus pandemic has placed companies under stress and many are starved of liquidity. In most of the sectors, there is destruction of demand. In this scenario, if banks do no rollover of existing loans, many corporates are likely to default, which would lead to an increase in bad loans, forcing banks to make provisions, which in turn will erode their net worth.

Industry bodies including Assocham, Ficci and Naredco are seeking restructuring of outstanding loans and extension of the repayment period. Besides this, industry bodies are also asking for fresh loans to re-start operations.