There is a strong possibility of the Reserve Bank of India (RBI) revisiting old debt restructuring schemes to help India Inc. as well as banks in these difficult times.
Presently, the banks enjoy a 90-day moratorium from NPA classification, granted by the Finance Ministry to lessen their provisioning burden amid the coronavirus outbreak. But the clock would start ticking once the moratorium period ends. The banks as well as corporate sector are worried about a staggered exit from the ongoing nationwide lockdown, which would create financial pains as revenues won't be sufficient to cover the costs.
Currently, the loans worth more than Rs 35 lakh crore in hospitality, aviation, tourism, real estate, NBFCs, MSMEs and unsecured loan segment are directly impacted by the lockdown. The current stringent regulatory framework of dealing with stressed assets would only accelerate bankruptcies.
Nothing is stopping banks from restructuring the stressed loans by extending the tenure and a putting moratorium on interest, but there is no incentive in terms of forbearance from NPA classification. "Any restructuring of loans immediately triggers NPA provisioning. There is a need for forbearance for a short period of 2-3 years," says the banker.
In the past two weeks, the banks have been discussing the possibility of a restructuring scheme under the umbrella of Indian Banks' Association (IBA). While RBI has focused on creating liquidity in the market, the next on its agenda would be relaxing some of the regulatory or prudential guidelines for a short period to support the banks and the corporate sector.
In the pre-coronavirus era, the RBI had discouraged restructuring schemes as the facility was often used by banks and corporate to evergreen loans. The failure rate of corporate debt restructuring was on the higher side.
The debt payment restructuring mechanism was introduced in 2015 by then RBI Governor Raghuram Rajan, but it was discontinued three years later. The idea was to push all the stressed cases under the newly set up Insolvency and Bankruptcy Code (IBC).
Under the 2015 restructuring mechanism, the RBI had offered innovative scheme of strategic debt restructuring (SDR), which allowed lenders to convert unsustainable debt into equity and take majority control of the company. Similarly, a S4A scheme allowed lenders to restructure the unsustainable debt portion. But both didn't show any results as there were no buyers or the banks had disagreements over the amount of loan haircut.
Given the challenges to recover or restructure loans under the IBC framework, there is a need for a restructuring mechanism outside the bankruptcy law. That's where the need for revisiting old schemes has arisen in these difficult times. In its policy response to coronavirus disruption, the RBI has been very accommodating. RBI Governor Shaktikanta Das has said time and again that the central bank will do whatever it takes to keep the financial system and financial market sound.
In the current regulatory framework without a restructuring mechanism with NPA forbearance, the stressed loans would follow a one month review by the lender, once default happens. This will be followed by a six-month period to implement the restructuring scheme. If they fail to implement it, a 20 per cent provisioning kicks in which increases to 35 per cent in a year's time. The current six-month window is too short a period as the stress is mainly induced by the COVID-19 lockdown.
The bankers are worried as they have limited capital, low credit growth, and NPAs of over 9 per cent of the advances to the industry. The global economies are already staring at a recession. The domestic economy is in slowdown, with credit growth at a historically low level of 6 per cent.
The coronavirus crisis would put the banks in a condition similar to 2013 -14 with rising NPAs, which would kick in a cycle of lower profitability and losses, fast receding capital, requirement for more capital, and probably turning some lenders into weak bank