One-Time Loan Restructuring Dilemma – RBI Won’t Commit and India Inc Won’t Stop Asking
- Ministry of Finance and the
RBIconsider the option of a one-time restructuring of loans in all sectors
- In the past, RBI was uncomfortable with the practice calling it a “misleading bank” and fears that a one-time restructuring could open the floodgates.
- The Confederation of Indian Industry (CII) is pushing for reform with some guidelines that could address the RBI’s concerns.
All eyes will be on future monetary policy to see if the
actively» discussed as an option by the Ministry of Finance. Even as the RBI remains moot on the subject, behemoths like Uday Kotak and Deepak Parekh continue to press for industry-wide relief.
RBI’s dilemma is to choose between what former Governor Raghu Rajan once called “cheating banking” or the second option, which is for the banking system to use its provisions once the moratorium ends on August 31.
The apex bank’s own stress tests show that the level of bad debts or non-performing assets (NPA) could be between 12% and 15% by the end of the year. Abizer Diwanji, head of financial services at EY India, told Business Insider that this may leave the RBI little choice.
“Given this, all industries across the country have been affected, even industries that had defaulted before COVID happened – there the chances of recovery are close to zero, even in the post-COVID situation” , did he declare.
To the NPA or not to the NPA
Currently, nothing prevents banks from restructuring their accounts. The catch is that they have to declare the account as a non-performing asset first. However, declaring an NPA account would also require a bank to set aside 15% of the loan value to cover the risk of default.
Higher NPA levels mean more provisioning and that means more demand for capital. “When there is a lack of capital in the market, banks lose confidence. When banks lose confidence, deposits run out. When deposits run out, there is a liquidity problem. This is the traditional cycle that the bank follows,” Diwanji explained.
For a one-off, large-scale restructuring, industry bodies request that accounts not be declared NPA. If an account is not declared NPA, it is good for the bank’s balance sheet and the borrower is likely to see additional funding. “The reclassification of the NPA is not to hide something, rather it is to allow the cycle to begin again,” Diwanji said.
However, RBI has issues with this approach being used to show higher earnings to gain better valuation in the stock market.
Everyone wants a piece of the cake
The one-time restructuring would also open the floodgates to any accounts wishing to exit their existing payment plan. If a borrower probably only has one chance to restructure their loan, they are likely to be more conservative in their recovery estimate, ie. one year to recover in a pre-COVID world versus five years to recover after COVID, according to Diwanji.
Here is what the Confederation of Indian Industry (CII) offers:
- Funding only on the basis of “holding in operation”. Banks will only give enough money for the entity to survive, not to grow.
- If at least 15% of the restructured loan is not paid – either through transactions or refinancing – within 18 months, the account will be classified as NPA.
- Any new money donated by the banks as part of the restructuring should be a priority — it takes precedence over all other corporate obligations.
- Get rid of all the bureaucratic processes that are there for restructuring – agency ratings, forensic audits and assessments – because everything is uncertain in the post-COVID scenario.
“There is a growing opinion among members for a one-time restructuring,” Uday Kotak said during RBI Governor Shaktikanta Das’ address to ICN National Council members. The demand for loan restructuring is growing louder as bankers are not in favor of an extension of the moratorium period. It remains to be seen whether the Reserve Bank of India will grant this reprieve in its policy coming this week.