When you are stressed, you go for a holiday. But when you realise it is not enough, you want the holiday to be extended and considered as work too. Enter one-time restructuring and forbearance for banks.
The Reserve Bank of India (RBI) kept its repo rate unchanged at 4% on Thursday, but allowed a bunch of regulatory relaxations for banks, the biggest of which was one-time restructuring. This has been a big ask by bankers given that the stress on borrowers due to the pandemic has not abated so far.
Banks can now restructure loans up to December, without naming them as bad. But unlike the previous episode of corporate debt restructuring, the central bank has taken care to tighten the conditions.
First, restructuring is allowed to only those borrowers who have behaved well in the past and have been repaying regularly. Second, there is a strict timeline that banks have to adhere to and they cannot squabble among each other in implementing the plan. Third, lenders have to assume some loss and set aside 10% provisioning against the loans restructured. In return, borrowers may get a tailor-made restructuring plan that may involve a two-year moratorium, and an extension of the tenure of the loan.
Also, loans that are not overdue beyond 30 days are only eligible, making sure that only covid-19 related stress is treated, and past transgressions are not swept under the forbearance carpet.
That said, the 10% provisioning against all loans so restructured is at best modestly higher than the 5% provisioning prescribed in the previous restructuring schemes. “The provisioning is not very high. The CDR process had a 5% provisioning and now it is 10%, which banks have anyway done currently against moratorium loans,” said Ravikant Bhat, banking analyst at IndiaNivesh.
Banks were also required to keep 10% provisions against loans that are under moratorium. But private sector banks have already made even larger provisions. With the one-time restructuring, it is clear that the RBI won’t extend the moratorium period beyond August. Depending on how much of the moratorium loans require restructuring, the provisioning requirements of the banks may not change in a big way.
Ergo, bank shares rose today on the news, given that the provisioning demand is modest. Also, investors want to watch what an external committee prescribes for the resolution process. To ensure that the whole process is kosher, an expert committee led by former ICICI bank chief K.V. Kamath will validate the restructuring process above a certain threshold of loans.
Analysts would now watch for the extent of restructuring that banks announce in the coming quarters. While restructuring is well intended to help borrowers withstand the pandemic’s onslaught, lenders need to monitor the repayment capacity regularly. The RBI’s past experience with forbearance has not been a good one. While a pandemic is reason enough for handholding, the central bank needs to be alert for any misgivings.