Home >Markets >Mark To Market >Covid-19 will be a capital problem if  RBI delays forbearance to  banks

The lockdown across the country to reduce the spread of Covid-19 is having a massive impact on business activity. This portends a big hit on incomes of individuals and corporations alike.

At such times, it is not unusual for borrowers to expect relief from their lenders on repayment schedules. By extension, it should not be extraordinary for the regulator to allow lenders some leeway as well.

Ergo, demands of forbearance by bankers have begun with two of the largest lenders in the country pitching for a widespread relaxation covering the entire economy. “We have to clearly come out with forbearance across the length and breadth," said HDFC Bank Ltd chief Aditya Puri in a conference call earlier this week.

But also note that lax forbearance policies were behind the pile-up of bad loans in the past, and the Reserve Bank of India (RBI) is likely to baulk at giving it again. Even so, bankers said that enough safeguards can be put in place. To start with, forbearance can be time-bound. “Just push the NPA cutoff date beyond 90-days by 3-6 months," said Ananth Narayan, associate professor at SP Jain Institute of Management and Research. In other words, banks should be allowed to classify loans with delayed repayments as standard for a period. For that, current rules which mandate repayments due over 90 days be labelled as bad should be relaxed. In specific cases, loan repayments may also be rescheduled for a longer period, which means restructuring.

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Bankers say that RBI can put several safeguards to avoid a repeat of the misuse of forbearance. “It can be a one-time thing. The duration of the forbearance would depend on the assessment of the tenure of this crisis and how long it stretches," said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank Ltd.

Meanwhile, lenders are trying on their own to support borrowers. HDFC Bank is trying to assess the impact on its loan book and is willing to cut some slack to its borrowers hit by the lockdowns. State Bank of India has announced a targeted Covid-19 fund, which would lend at a flat 7.25% interest rate with a moratorium clause.

But these are mere trickles in front of the roughly 20% exposure of Indian banks to vulnerable sectors estimated by Nomura Financial Advisory and Securities (India) Pvt. Ltd.

At the heart of the demand for forbearance is capital conservation.

Public sector banks that account for more than half of credit do not have healthy capital positions. A surge in bad loans and provisioning would erode capital and impinge on growth. As such, banks have become risk averse towards many sectors. Forbearance would free up capital.

Forbearance may have become a dirty word, but it is a necessary evil to avoid a crisis of capital. Allowing banks to paint some loans differently could go a long way to avoid a costly outcome of capital erosion.

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