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Photo: Mint

Lenders tap debt rejig consultants

Punjab National Bank, UCO Bank and Bank of Maharashtra have advertised for consultants, though the RBI is yet to make up its mind on debt restructuring

MUMBAI : State-run banks are hiring specialists to study the feasibility of an expected debt restructuring, fearing a pile-up of bad loans once the loan moratorium ends on 31 August. The external consultants will conduct so-called techno-economic viability (TEV) studies to ascertain how a loan account will perform after a potential debt recast.

Punjab National Bank, UCO Bank and Bank of Maharashtra have already advertised for such TEV consultants, though the Reserve Bank of India (RBI) is yet to make up its mind on debt restructuring.

Tacit government support for such a recast, with finance minister Nirmala Sitharaman stating her ministry is in conversation with RBI on the issue, has raised hopes among banks and borrowers. “The focus is on restructuring. The finance ministry is actively engaged with RBI. In principle, the idea that there may be a restructuring required is well-taken," she said on 31 July.

The Indian Banks’ Association has written to RBI seeking a one-time loan recast on the basis of the central bank’s 7 June 2019 circular on stressed assets. Despite considerable relaxations since the lockdown was lifted on 1 June, continuing restrictions and the looming fear of infections have crippled sectors, leading to a higher risk of defaults in bank loans.

Experts say it’s the right time to allow a one-time debt recast, which would give banks some headroom in a year plagued by the pandemic. Considering RBI’s projections of an at least 400 basis points (bps) rise in bad loans in FY21, the ensuing provisions will eat up capital.

“Banks were given a special debt restructuring dispensation after the 2008 crisis as well. However, there were instances of lenders misusing the provisions, and an environment of mistrust was created, leading to the regulator thinking twice before approving it this time," said Nirmal Gangwal, founder and chairman of Brescon and Allied Partners LLP, a debt restructuring advisory firm.

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