Restructuring stressed loans in India
Ramal Bandyopadhaya writes in Business Standard that the RBI's decision to allow restructuring of stressed bank loans will help to lower gross NPAs in the banking system. Some 80% of the loans in the banking system qualify for restructuring.
None could miss the collective sigh of relief from the bankers’ community on the Reserve Bank of India’s (RBI) decision to open a restructuring window for stressed loans. Those accounts, which had been in default for not more than 30 days as on March 1, 2020, can be restructured if the borrowers are unable to service them because of their businesses being affected by the Covid-19 pandemic. The loans can be restructured, among others, by funding interest, converting part of debt into equity and giving the borrowers more time to pay up.
The banks must disclose such recast and set aside 10 per cent of the exposure to make provision for the restructured loans. In June 2019, the RBI had framed norms for loan restructuring, making it mandatory for banks to treat restructured, stressed loans as sub-standard unless there was a change in ownership of the borrowing company. Now, the banks can treat the restructured loans for Covid-19-affected companies as a standard asset even if there is no change in ownership.
[...]Going by one estimate, at least 80 per cent of the loans in the banking system will be eligible for such restructuring. One way of looking at this is that it will delay the inevitable by two years. Also, the 10 per cent provision requirement seems to be low as the banks’ unrealised but booked interest income from stressed borrowers is far higher. By RBI’s estimate, the gross bad loans of the banking system, which dropped to 8.5 per cent in March 2020, could rise to 14.7 per cent by March 2021. The restructuring window may not allow such a spike. The one-time forbearance was the need of the hour, particularly when all banks are not adequately capitalised. The good news is the presence of enough caveats to prevent misuse by the banking industry. In absence of this, many banks would have resorted to the tried and tested method of ever-greening — giving fresh loans to the stressed borrowers to keep the accounts good.
Current economic contraction is different from previous ones
Harish Damodaran argues in The Indian Express that arresting the current demand slowdown requires government investment and that debt concerns should not be overead. Despite fiscal slippages, yields on 10-year government bonds have dropped to 5.9% for the center and about 6.4% for states. This may fall further if banks are not able to lend the money they have collected as deposits.
That makes the current contraction totally different from the previous ones which were “supply-side” induced. There’s no shortage today of food, forex or even savings: Aggregate deposits with commercial banks as of July 31 were Rs 14.17 lakh crore or 11.1 per cent higher than a year ago. The closest parallel one could draw is with the 2000-01 to 2002-03 period of the Atal Bihari Vajpayee-led government. The Food Corporation of India’s (FCI) grain stocks in July 2002 were 2.6 times the buffer norm and the country ran current account surpluses in 2001-02 and 2002-03. But the economy didn’t contract then; growth merely fell from 8 per cent in 1999-2000 to an average of 4.5 cent during the next three years.
What we now have is a classic “western-style” demand slowdown that post COVID-19 has turned into a full-fledged recession bereft of consumption and investment demand. Households have cut spending as they have suffered income, if not job, losses. Even those with jobs are saving more than spending because they aren’t sure when their luck would run out. The same goes with businesses. Many have shut or are operating at a fraction of their capacity and pre-lockdown staff strength. The ones still making profits are conserving cash. If at all they are investing, it is to buy out struggling competitors and not to create new capacities. Just as households are uncertain about jobs and incomes, firms don’t know when demand for their products will really return.
This demand-side uncertainty and the resulting economic contraction is something new to India. And it stands out in a situation where food stocks and forex reserves are at record highs. Meanwhile, banks are also facing a problem of plenty. While their deposits are up 11.1 per cent, the corresponding credit growth has been just Rs 5.37 lakh crore or 5.5 per cent. With very little credit demand, the bulk of their incremental deposits are being invested in government securities, which have increased year-on-year by Rs 7.21 lakh crore or 20.3 per cent.
