RBI Begins Work On Restructuring Plan For Covid-Hit Firms: BQ Exclusive

The one-time restructuring scheme would likely cover companies which have defaulted between March 1, 2020, and March 31, 2021.

Inside the press room at the Reserve Bank Of India. (Photographer: Karen Dias/Bloomberg)
Inside the press room at the Reserve Bank Of India. (Photographer: Karen Dias/Bloomberg)

The Reserve Bank of India has started the ground work for a one-time restructuring scheme to help companies which are affected by the Covid-19 pandemic. The regulator is discussing contours of the plan internally and informally with senior bankers before a final decision is taken, said two people with direct knowledge of the matter, who spoke on condition of anonymity.

The one-time restructuring scheme would likely cover companies which have defaulted between March 1, 2020 and March 31, 2021.

As per unofficial conversation between bankers, the restructuring scheme will help companies extend the repayment schedule and reduce interest rates, without attracting an asset classification downgrade, as is required currently. The standstill on asset classification will help companies continue as ‘standard’ account, which will allow them to continue getting funding. A bad loan tag typically leaves banks reluctant to lend further to companies.

In terms of the structure of the scheme, it will likely follow the relief provided to micro, small and medium enterprises last year, the people quoted above said. Under that scheme, the RBI said that any such restructuring concluded by December 2020 will not lead to the account being tagged as a non-performing asset.

Banks will be required to take into account the cash position of companies during the six-month moratorium period between March 1 to August 31, before approving a restructuring plan. They would also need to consider the extent to which the business is likely to revive once the lockdown is lifted, the people quoted above said. The restructuring will be at the discretion of the banks.

The relief in asset classification would be an exception to the June 7, 2019 circular. According to that, companies which undergo restructuring have to be classified as non-performing assets. These accounts can only be upgraded if the ownership of the company is changed under the restructuring scheme, or if the borrower is able to clear a portion of the dues within a specified time period.

The bankers quoted above said that no final decision has been communicated by the RBI.

An email sent to the RBI on Friday morning was not immediately answered.

Return To Restructuring Past

A restructuring scheme with asset classification standstill will be a move back to the pre-2013 days when the RBI allowed restructuring of corporate accounts in a similar fashion. However, the regulator has since done away with such forbearance and has sought higher provisions as well as asset quality downgrades for restructured accounts. Senior RBI officials have maintained that forbearance simply delays recognition of the problem.

According to a Macquarie Research report released on Friday, past experience with blanket forbearance has been quite bad.

“The issue was that both banks and corporates used the regulatory forbearance to their advantage and loans where businesses had no viability was restructured and eventually a substantial proportion of loans turned into NPLs,” Macquarie analysts said in the report.

However, the Covid-19 crisis presents an exceptional scenario. The RBI, in March, allowed banks to offer borrowers a three-month repayment moratorium, which was later extended till end of August. Macquarie Securities estimates that about 25-30% of system level loans are under moratorium.

Bankers fear that defaults and restructuring requests could rise after the moratorium ends.

To avoid this, the banking community has been lobbying for a one-time restructuring scheme for the last few months through representations from the Indian Banks’ Association. In April, banks had proposed that the regulator allow amendments to the June 2019 circular, wherein they could upgrade restructured companies without change in management or mandatory repayment requirements.

On Thursday, while addressing a webinar organised by Chennai International Centre, Union Finance Minister Nirmala Sitharaman said that the government is in talks with the RBI for restructuring relief.

Covid-19 and the national lockdown have affected multiple sectors such as hospitality, aviation, transport, construction, manufacturing, etc. Economists predict a sharp deceleration in the economy, with India likely to see its first recession in nearly four decades.

The sharp slowdown will likely constrain repayment capacity of borrowers. A one-time restructuring scheme could help these borrowers till they are able to steady their businesses, the people quoted above said.

In their Friday report, Macquarie analysts suggested that the banks and the RBI could take a more measured approach toward debt restructuring of companies.

“RBI should extend the restructuring package only to select beleaguered sectors like commercial real estate, aviation, tourism etc instead of allowing a blanket restructuring of all loans,” the analysts said.

The RBI should also consider building in further checks and balances to avoid misuse, they added.