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NPA worries may force RBI’s hand on a loan recast

RBI and  the govt  are  considering  a  one-time restructuring of loans, which includes an extension of the date of recognition of non-performing assets beyond 90 days to help corporates hit by covid-19. Mint takes a look at the potential impact of this move

RBI and the government  are  considering  a  one-time restructuring of loans, which includes an extension of the date of recognition of non-performing assets beyond 90 days to help corporates hit by covid-19. Mint takes a look at the potential impact of this move.

What is restructuring of bank loans?

Restructuring is a process that allows banks to modify the loan terms when a borrower is facing difficulties. Banks seek permission to restructure loans to avoid them being classified as non-performing assets. If a loan is labelled as NPA, then banks will have to set aside more provisions. Restructuring happens through a change in the repayment period, repayable sum, number of instalments, rate of interest, rollover of credit facilities, sanction of additional credit facility or enhancement of existing limits. There could also be compromise settlements where the time for payment of settlement amount exceeds three months.

What is RBI’s view on one-time  restructuring?

RBI has been opposed to debt restructuring, since banks in the past had to classify restructured loans as standard accounts and set aside lower provisions. However, RBI has since taken a U-Turn and is now considering this option. That practice ended in 2015 when governor Raghuram Rajan began an asset quality review of banks, which revealed divergence between reported levels of impairment and actual positions of large corporate accounts. This led to recognition of stressed accounts as NPAs, resulting in a surge in bad loan ratios of banks from 3.4% of gross advances in March 2013 to 4.7% in March 2015, and further to 9.9% by March 2017.

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Grim forecast

What is the lenders’ take in such a scenario?

Banks and corporates have been seeking an extension of the date of recognition of NPA up to 150 days due to the corporate sector distress. Typically, if a loan is not paid within 90 days, then it is classified as an NPA. Currently, banks have to set aside 0.4% provision in respect of standard assets and 15% provision in respect of sub-standard assets.

What is the current NPA situation?

The lockdown has affected the repayment ability of borrowers and in turn, could affect the asset quality of banks. According to rating agency Icra, the gross NPAs of banks are likely to worsen to 11.3-11.6% by the end of this financial year from 8.6% as of March 2020, due to disruptions caused by the coronavirus pandemic. Fresh gross slippages are estimated to be at 5-5.5% of standard advances during 2020-21, which will increase banks’ credit provision and impact their earnings.

Will RBI go for a sector specific restructuring?

The jury is still out on that. Mint had reported on 17 June that the Reserve Bank of India may look at a restructuring package for all sectors. However specific sectors like aviation, commercial realty, tourism and hospitality business have been severely hit by the coronavirus pandemic. The data from RBI shows that banks had an exposure of over 2.3 trillion to commercial realty, nearly 46,000 crore to tourism and hospitality businesses, and over 30,000 crore to aviation firms towards the end of April.


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