ICRA Lanka revisits default recognition approach amid loan moratoriums

As loan moratoriums came into effect and discretion given to banks to make modifications to payment terms and loan contracts with borrowers, ICRA Lanka said they revisited their default recognition approach, which otherwise places entities under default category for simply failing to service their loans. 

The Central Bank announced a debt moratorium on March 27,  giving time for the businesses and individuals to make written requests till April 30 to their banks to become eligible for the concession up to 6 months, and for some others up to 3 months.

However, the rating agency said they would not put those borrowers who are eligible for the moratorium but may have missed their debt servicing payment during this intervening period, under the default category, but some documentary evidence to the effect of deferment would be key.  

Pending the finalisation of the application process and approval of the same, it is possible that in the intervening period, the borrowers eligible to be provided relief, may miss their payments to the financial institutions. 

ICRA Lanka would not be considering such missed payments as default for the time being. However, if there is no official deferment communication from the financial institutions in due course, ICRA Lanka would review the above stance on default recognition,” ICRA Lanka, part of Moody’s Rating said in a special report, which stipulated their approach to review its ratings in response to the 
COVID-19 crisis. 

However, the rating agency reiterated that by no means they would become lenient on the application of their rating criteria on entities just because there is a blanket moratorium in place. 

The ability of the entity to submit documentary evidence to the effect of deferment of the loan servicing would be the single most important determinant of the status of the entity’s default recognition. 

And this change in the default recognition policy of ICRA Lanka would be applicable till the period of the moratorium. 

Besides the loans from banks and other financial institutions, the same treatment will be applied on other market debt instruments such as commercial papers and debentures, provided all investors approve the restructuring of payment terms of the instrument before the due date of debt servicing. 

The rating agency said it is currently in the process of reviewing its ratings and would be taking action as warranted to reflect the breadth and the severity of this crisis. 

For this, the rating agency is currently categorizing the industries and entities based on the level of risks posed to each between high, medium and low risk while the priority will be given for those in the high and medium risk categories in carrying out rating reviews which are considered as most and moderately vulnerable. 

Among other criteria, the entity risk will primarily be determined by the liquidity position as availability of liquidity or access to liquidity will be key in determining the company’s solvency in the current context, the rating agency said.  

On March 27, the Central Bank also made available Rs.50 billion liquidity by way of a refinance package for the eligible borrowers to obtain working capital loans at 4 percent interest rate in a bid to backstop them from defaulting their loans and support their recurrent expenditure funding. 

“In addition to the immediate term liquidity assessment for various cases, ICRA Lanka may also be redrawing its projections by assuming that a ‘business as usual’ operating environment may not return soon. The recovery is likely to be gradual and even long drawn in several sectors. 

Accordingly, the projections may be drawn in a manner which assumes a severe disruption for at least three months, followed by only a slow recovery. The above analysis would be an additional input for deciding upon the rating action,” the rating agency said.