Banks may play it safe to skirt haircuts

Lenders may prefer allowing borrowers greater leeway in making repayments, in anticipation of improved cash flows instead of carving out the debt into sustainable and unsustainable buckets as was done in the past, which usually involves taking a significant haircut on the unsustainable debt, senior bankers and industry experts said.

The RBI set up an expert committee led by Kamath to recommend parameters for restructuring stressed loans. The committee submitted its report to RBI on 4 September and its recommendations have been broadly accepted. “It is a mix of covering as many companies as possible without going overboard," said C.S. Setty, MD, State Bank of India.

Lenders will look at using the moratorium to shift repayments for stressed borrowers, with the quantum depending on the impact the pandemic has had on their cash flows, said Setty.

“Haircuts come in a situation where operations are intrinsically unviable and when banks also have to reduce interest rates, taking a hit on the net present value (NPV) of the loan," he said.

RBI has allowed lenders to adopt a graded approach depending on the degree of covid impact on a borrower. Bankers said deep restructurings will only be used for severely stressed corporates. In such cases, the unpaid interest component could be converted into a funded interest term loan (FITL). FITL is a fresh loan that helps stressed borrowers repay existing interest over time and is used in most deep recasts.

“We highlighted that in the past cycle, restructuring norms were liberal with banks having a lot of discretion leading to around 70% of restructured accounts turning into NPAs (non-performing assets). With only a two-year maximum extension for residual tenure and prudent restructuring metrics recommend by the committee, the scope of using restructuring as an ever-greening tool is lower," analysts at CLSA said in a note.

RBI said that banks must ensure that restructured loans meet specific financial parameters by March 2022.

N.S. Vishwanathan, former deputy governor of the central bank, feels that the objective of the 6 August circular and the appointment of the Kamath committee is to avoid the shortcomings of earlier restructuring systems by “ensuring that the facility of debt resolution with asset classification benefits is extended only to those borrowers who would not have been in default but for the impact of the covid-19 pandemic and would be viable post the debt recast".

shayan.g@livemint.com