MUMBAI : Lenders are pinning hopes on the Reserve Bank of India’s (RBI) nod to a loan restructuring scheme for corporates to manage asset quality concerns, as the government has agreed to their suggestion of a loan-guarantee proposal for bad loans.
The scheme, proposed by the lenders under the aegis of the Indian Banks’ Association (IBA) is being considered by the central bank, said two people aware of the development. They said that bankers have sought the creation of a bad bank which will act in tandem with the debt recast programme, if approved.
Bankers expect asset quality to take a beating once the moratorium ends. Rating agency Crisil estimates that bad loans will rise to 11-11.5% by March 2021 from 9.6% expected for FY20.
“While companies which are stressed but still not non-performing would come under the debt recast scheme, bad loans would be transferred to the bad bank. For the bad bank, we are reviving a plan already made under the Sashakt plan by the government in 2018," said the first person quoted above. Under Project Sashakt, the plan was to set up an asset management committee (AMC) and multiple sector specific alternative investment funds (AIFs) to invest in these stressed assets.
Finance minister Nirmala Sitharaman on Wednesday announced a relief package for small businesses. As part of the package, the government, she said, would backstop loans worth ₹3 trillion for micro, small and medium enterprises. These loans would be applicable to small businesses with up to ₹100 crore turnover or with an outstanding loan of up to ₹25 crore.
“The MSME scheme was also part of bankers’ proposal to the government. Now, we are awaiting some scheme for larger corporates, many of whom might face difficulties in servicing their loans as a consequence of the covid-19 disruption," said the first person. Bank loans to industries stood at ₹28.85 trillion as on 29 March, with large industries accounting for ₹24.03 trillion in the same period, showed data from RBI.
The MSME sector, which employs millions of people, is one of the casualties of the ongoing countrywide lockdown that has led to closure of factories and businesses as the government intensifies steps to contain the pandemic. The share of the MSME sector in India’s gross domestic product (GDP) stood at 30.3% in FY19, up from 29.7% in FY18, according to data submitted in the Parliament on 12 March.
The second person quoted above said that the loan recast proposals has two parts. For loans below ₹1,500 crore, debt recasts will be done on a case to case basis, led by the lead bank. However, for loans above ₹1,500 crore, restructuring proposals will be made on the basis of RBI’s 7 June circular on resolution of stressed assets.
“At present, all debt recasts are downgraded to non-performing asset (NPA) category. We have requested RBI to relax this criterion for the time being, considering how covid-19 has affected companies of all scale and sizes," the person said.
He added that the proposal, if approved, is likely to have some safeguards like a monitoring mechanism by the RBI so that bankers use discretion on restructuring loan. This would check it from going the erstwhile corporate debt restructuring (CDR) route which was wound up by RBI in 2018, 17 years after it came into existence. While the cell approved debt recasts of ₹4 trillion, ₹84,677 crore of loans saw a turnaround.
“We have also sought relaxations on the mandatory forensic audit of companies before debt recast," said the second person.
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