RBI may allow one-time restructuring of stressed loans with conditions

• In 2019, however, RBI had allowed banks and NBFCs a one-time restructuring of loans of up to ₹25 crore
• Banks are asking for a similar restructuring forbearance for other large accounts by exempting them from declaring these accounts as NPA

MUMBAI : RBI is exploring the option of allowing banks a one-off restructuring of loans, said a senior official aware of the matter on condition of anonymity. This is one of the suggestions made by the banking industry to help sectors affected by coronavirus and also deal with the stress building up on account of suspension of insolvency proceedings for a year.

“The option is on the table… When and in what manner, we have to see. In fact there were representations that don’t give restructuring, funds will get diverted and moratorium is enough. But there is a lot of demand from the industry. In certain sectors there is definitely a need like sectors that are hit. Those are more in need. But it has to be for all. But there needs to be some conditions in place,” said the official.
The RBI spokesperson declined to comment on the matter.

The central bank was earlier opposed to the idea of allowing another round of restructuring based on the past experience when banks misused the option. Banks took recourse to this particular regulatory forbearance by classifying these restructured loans as standard accounts and setting aside lower provisions against this. This incentivized restructuring rather than recognising bad loans.

All this came to an end when the then Governor announced the Asset Quality Review (AQR) in 2015. During the course of AQR, RBI looked at the status of large corporate accounts across banks which revealed significant divergence between the reported levels of impairment and actual positions. This led to banks recognising stressed accounts as NPAs resulting in marked increase in the NPA 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. RBI also asked banks to provide a minimum of 15 percent of the loan value of the restructured account to cover the risk of default, versus only 5 percent earlier.
In 2019, however, RBI again allowed banks and non-banking finance companies a one-time restructuring of loans of up to ₹25 crore to micro, small and medium enterprises (MSMEs) that were in default on 1 January, 2019, without having to mark them as non-performing assets (NPAs). Lenders are being given an extension of 15 months (up to 31 March 2020) to pretend that these stressed loans are standard.

Banks are asking for a similar restructuring forbearance for other large accounts by exempting them from declaring these accounts as NPA. Currently, banks have the provision of restructuring loans under the 7 June circular, but that requires banks to set aside higher provisions.

On 17 April, RBI asked banks to make 10% provisions for all loans under the three-month moratorium announced on 27 March and said banks will get 90 more days to resolve assets under the 7 June 2019 circular.