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Home / Industry / Banking /  Banks pin hopes on RBI nod to debt recast to manage asset quality post covid-19

MUMBAI : Lenders are pinning hopes on the Reserve Bank of India’s (RBI) approval of a loan restructuring scheme for corporates to manage asset quality concerns as the government has agreed to a loan-guarantee proposal for small businesses.

The scheme, proposed by the lenders through the Indian Banks’ Association (IBA), is being considered by the central bank, said two people aware of the development.

Bankers have sought the creation of a bad bank, which will act in tandem with the debt recast programme, if approved.

Bankers expect asset quality to take a beating once the moratorium ends. Rating agency Crisil estimates that bad loans will rise to 11-11.5% by March 2021 from the 9.6% expected for FY20.

“Companies that are stressed but still not non-performing would come under the debt recast scheme, while bad loans would be transferred to the bad bank. For the bad bank, we are reviving a plan already made under the Sashakt project by the government in 2018," said one of the two people mentioned above. The plan under Project Sashakt was to set up an asset management committee and multiple sector-specific alternative investment funds to invest in these stressed assets.

Finance minister Nirmala Sitharaman on Wednesday announced a relief package for small businesses. As part of the package, the government, she said, would backstop loans of 3 trillion for micro, small, and medium enterprises. These loans would be applicable to small businesses with up to 100 crore sales or with an outstanding loan of up to 25 crore.

“The MSME scheme was also part of the proposal made by the bankers to the government. We are awaiting some scheme for larger corporates, many of whom might face difficulties in servicing their loans," said the person quoted above. Bank loans to industries stood at 28.85 trillion as on 29 March, with large industries accounting for 24.03 trillion in the same period, showed RBI data.

The MSME sector, which employs millions of people, is one of the casualties of the ongoing lockdown. The share of MSMEs in gross domestic product was 30.3% in FY19, up from 29.7% in FY18, according to data submitted to Parliament on 12 March.

Banks have urged the government to fully guarantee their incremental loans to MSMEs, Mint reported on 15 April. The loan recast proposal has two parts, said the second person cited above. Debt recasts will be done on a case-to-case basis for loans below 1,500 crore, led by the lead bank. However, for loans above 1,500 crore, restructuring proposals will be made on the basis of RBI’s 7 June circular on resolution of stressed assets.

“All debt recasts are downgraded to non-performing asset category. We have asked RBI to relax this criterion for the time being," said the second person.

The proposal, if approved, is likely to have some safeguards such as a monitoring mechanism by RBI so that bankers use discretion on restructuring loans.

“The recast will help lenders and borrowers. Project lending has been done on the pre-covid-19 projections of demand and cash flows. This may not hold true if the situation persists. Lenders will be able to find a solution to covid-19 related stressed assets beyond the National Company Law Tribunal mechanism and settle for a mutual beneficial time bound solution," said Sameer Narang, chief economist, Bank of Baroda.

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