With the economy slowing down, and demonetisation and the goods and services tax (GST) dealing sharp blows in quick succession to smaller businesses, many business owners have got into difficulties. This is reflected in the rising non-performing asset (NPA) levels in commercial vehicle loans and loans against property
(see table), two borrowing facilities utilised widely by businessmen.
The rise in NPAs in commercial vehicle loans is linked to the economic slowdown. "The slowdown post demonetisation did impact the commercial vehicle business, which is very cash-driven. The introduction of GST
soon after also had an effect, which is why owners are finding it difficult to service their loans," says Parijat Garg, vice-president, CRIF High Mark, a credit information bureau.
The rise in NPAs in the loans against property
(LAP) segment is linked to the slowdown in the real estate market. "Property prices are not rising and in some cases they have even come down. As the value of the collateral declines, banks get conservative and reduce the credit line. Earlier, if they gave a loan to value (LTV) of 70% on a property valued at Rs 1 crore, now they may be giving the same LTV but on a reduced property value of Rs 80 lakh. So earlier if a person got a loan of Rs 70 lakh, now he would get only Rs 56 lakh, creating a gap of Rs 14 lakh. He may have already used up the Rs 14 lakh in his working capital cycle. In the absence of other refinancing options, he would get into problems," says Arun Ramamurthy, co-founder, Credit Sudhaar, a company that helps people improve their credit score.
The rise in LTV ratios in the LAP segment is another issue. "Five years ago, banks used to fund 40-50% of the value of the property but now they fund 70-75%. Exposure on the asset has gone up, but the borrowed capital is not earning the kind of return required to service the loan," says Rajiv Raj, co-founder and director, Credit Vidya.
A businessman who finds himself unable to service his loans should not try to avoid the situation. "Speak to your bankers about your problems instead of avoiding them. If you don't pay your EMIs (equated monthly instalments) for a few months and don't get in touch with them, they may seize your vehicle, which would kill your source of income," says Garg.
In the current scenario, bankers would have witnessed many other distressed cases like yours. "If they are convinced that your problem is due to the macroeconomic situation and your business will bounce back as the economy recovers, they may be open to the idea of restructuring. They could lower your EMI
and increase the tenure," says Raj.
Another option is to unlock the value of other assets. "If your business has inherent strengths and the problem is temporary, one option is to unlock value in assets like gold, equities, ancestral property, etc.," says Ramamurthy.
A third option is to go for debt consolidation and take advantage of interest arbitrage opportunities available. "A businessman may have several loans. He may have taken an overdraft facility at 18%, a working capital loan at 16%, and so on. All these loans can be consolidated into a single loan with a single EMI.
There are chances that by doing so he may be able to reduce his interest burden by 100-200 basis points," says Raj.
An important development to note is that recently the Insolvency and Bankruptcy Board of India (IBBI) published the draft rules for dealing with the insolvency resolution process for individuals and small firms. Once notified, these rules will allow orderly bankruptcy resolution for small businesses in a transparent and rule-based manner.