Indian Lenders Seek A Return To Their Restructuring Past
Banks are seeking permission to restructure loans without marking them down as NPAs.
The country’s top lenders are reaching out the Reserve Bank of India, seeking a return to a time when banks were allowed to restructure stressed accounts without having to classify them as non performing.
The policy, known in industry parlance as forbearance, was widely blamed for under-reporting of bad loans till an asset quality review unearthed the true extent of stress on bank balancesheets. Now, even as bad loans remain elevated, banks fear that large scale restructuring may become necessary due to the fallout of Covid-19.
Over the next few days, the Indian Banks’ Association intends to write to the RBI seeking special forbearance for companies which delay loan repayments even after the three-month moratorium ends, two people in the know confirmed.
Bankers want the restructuring to include an extended repayment period, lower interest rates and additional financing, without any downgrade in the asset classification from standard to non-performing, the people quoted above said, speaking on condition of anonymity.
However, banks will not seek a management change for the companies, the bankers said, adding that the problems being faced right now are due to factors beyond the control of companies. The lenders will work with the promoters to resolve cash flow issues and manage the stress, the people said.
The Economic Times newspaper first reported on Wednesday that the IBA is in the process of drafting a restructuring plan for companies affected by COVID-19
On March 27, RBI Governor Shaktikanta Das announced that most term loan borrowers will be allowed to defer repayments for three months between March 1 and May 31, without an asset quality downgrade. The benefit was also extended to working capital borrowers, who would not be required to pay their interest payments for the three-month duration.
The move was aimed at easing liquidity pressures for borrowers who have seen revenues stall because of the national lockdown. The 21-day lockdown announced initially has now been extended till May 3.
While most public sector banks have offered a blanket moratorium to their borrowers, allowing them to choose if they want to repay their dues, private banks have chosen a more selective route. Borrowers who opt for the moratorium would see their repayment schedule extended even though interest continues to accrue.
To ensure that bank balancesheets are protected from any sudden rise in bad loans, the RBI has asked lenders to provision.
The RBI asked banks to set aside an additional 10 percent provisioning against borrowers who have chosen to take the moratorium on their repayments. These provisions can be adjusted against future slippages if the borrowers fail to meet their repayments after the moratorium ends. The RBI also said that the moratorium period would not be counted in calculating the 90-day overdue period used to mark an account down as an NPA.
While there may be some justification behind the demand from bankers, it can prove to be a slippery slope, said Saswata Guha of Fitch Ratings. It is very difficult to ascertain if banks are using forbearance in a justified manner or simply kicking the can, without proper transparency, Guha said.
We would be very cautious if the restructured assets start ballooning again to high levels as seen in the past. We are expecting a 200-300 basis points increase in the non performing loan ratios of the banking sector over the next two years. We expect about 40 percent of the impact to come through in FY20-21 and the rest in the next financial year. However, there is upside risk to our estimate as the situation is still quite fluid.Saswata Guha, Director - Financial Institutions, Fitch Ratings