Bankers and borrowers alike are weighing their options as a six-month moratorium on loan repayments ends on Monday, restarting the recovery process for an estimated 18% of their loan books.
Even as they expect a steady increase in bad loans, lenders are unlikely to use coercive methods that reflect poorly on them amid widespread distress, preferring instead to urge retail borrowers to make ad hoc payments towards dues that accrued during the moratorium period and reduce liability.
The Reserve Bank of India (RBI) has permitted debt restructuring by a maximum of two years, and bankers think it is ideal for a large number of retail borrowers who have lost jobs and wages amid the pandemic and the ensuing lockdown.
“It is not like the entire stress will be visible on day one after the moratorium ends. There will be a staggered rise in bad loans, depending on their overdue status before the deferment became effective," a senior banker said on condition of anonymity. He said the first set of bad loans will come from special mention account (SMA-2) accounts that are overdue between 61-90 days and then from SMA-1 with repayment delays of 31-60 days.
Under RBI’s guidelines, banks can use the new recast window only for loans that do not have more than 30 days of overdue as on 1 March, essentially meaning that over ₹5.7 trillion of stressed assets are outside its ambit. While even these can be recast, they will turn non-performing and attract higher provisions.
“The restructuring can be anything between 5% and 6% of the book. But when I say restructured books can be 5% to 6%, we are also factoring in a good number of personal loans; but, then, it can be quite lower than what we estimate," said Rajkiran Rai G., chief executive, Union Bank of India.
Like other banks, Union Bank also expects retail loan recasts to surpass the average of all other buckets. Rai told analysts on 21 August that the bank expects 7-8% of its ₹1.3 trillion retail loan book to be recast.
Having witnessed banks going on a loan recast spree in the last round of regulatory forbearance, the Reserve Bank has tightened the regulations this time. Still, experts believe that as much as half of all the restructured loans could fail and add to the existing pool of non-performing assets (NPAs).
“We believe non-performing loans from restructured loans would mainly depend on the pace of a potential economic recovery. Our base case is for a roughly 30-50% relapse rate in non-performing loans from the restructured pool, leading to 1.5-5% in additional non-performing loans in FY22," analysts at UBS Securities India Pvt. Ltd said in a note on 27 August.
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