A report from International Monetary Fund (IMF) has pitched for restructuring of loans given to companies and households to contain the grave impact of Covid-19 pandemic on economy.

According to the first chapter of its Global Financial Stability Report (GFSR) released on 14th April, "In the face of the unprecedented but temporary shock, and of the substantial official sector response, supervisors should encourage banks to prudently renegotiate loan terms for companies and households struggling to service their debts".

GFSR suggests: "This should be done without lowering loan classification and provisioning standards. While a loan restructuring may not automatically lead to an increase in credit risk or loan losses, if borrowers remain likely to repay their obligations, banks need to assess their customers' creditworthiness on an ongoing basis and reflect any deterioration in asset quality in a timely manner. In cases where authorities have announced a loan moratorium or repayment holidays, banks may not be able to reliably assess the implications of the crisis on their customers within a short period of time".

In the first instance, banks' existing capital and liquidity buffers should be used to absorb financial costs of any customer loan restructuring and to relieve pressures on banks' funding and liquidity using full flexibility within the existing regulatory frameworks. In cases where the impact is sizable and longer lasting and bank capital adequacy is affected, supervisors should take targeted actions, including asking banks to submit credible capital restoration plans. In such cases, authorities may also need to step in with fiscal support to banks' clients-either direct subsidies or tax relief to help borrowers to repay their loans and finance their operations, or provide credit guarantees to banks, it adds.

The Report suggest that central banks may intervene to prevent impairment in money, securities, and foreign exchange markets that could emerge in the wake of financial disruptions, that is, when funding or market liquidity deteriorates substantially relative to normal conditions or if dealers are not able to trade assets at reasonable prices and without excessive price fluctuations.

Similarly, Sovereign debt managers should put in place contingency plans for dealing with limited access to external funding markets for a prolonged period. From the perspective of the trade-off between cost and risk, reducing rollover risks should take priority over concerns about containing costs when there are large downside risks stemming from potential loss of market access.

GFSR notes that financial conditions tightened at unprecedented speed, exposing some "cracks" in global financial markets after emergence of pandemic. It says: "Market volatility spiked and borrowing costs surged on expectations of widespread defaults. Signs of strain emerged in major funding markets, including the global US dollar funding market".

It points out that historically, large capital outflows exacerbated domestic shocks in emerging market economies. These developments have raised the risk that the inability of borrowers to service their debts would put pressure on banks and cause credit markets to freeze up. A prolonged period of dislocation in financial markets could trigger distress among financial institutions, which, in turn, could lead to a credit crunch for nonfinancial borrowers, further exacerbating the economic downturn.