One-time restructuring of loans will help banks keep non-performing assets (NPAs) from reaching a two-decade high of 11.5 per cent, ratings agency CRISIL said. The decision will help banks maintain their asset quality while weathering the impact of coronavirus pandemic, it further said. The primary beneficiaries of loan restructuring would be corporate and retails loan accounts with exposures below Rs 500 crore, CRISIL added.
After its last monetary policy meeting that ended on August 6, the Reserve Bank of India had allowed lenders to restructure a few loans that were standard as on March 1, 2020 as an one-time arrangement. The central bank has permitted relaxations for corporate as well as personal loans under the June 2019 Prudential Framework on Resolution of Stressed Assets. MSMEs struggling due to the COVID-19 lockdowns have also been provided a three-month extension in the existing restricting scheme till March 31, 2020.
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This decision came on the back of the coronavirus pandemic, subsequent lockdowns and resultant economic stress. Veteran banker KV Kamath has been selected to lead a committee that would submit recommendations to the RBI on the required financial parameters. The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector, RBI Governor Shaktikanta Das had said.
Indeed, in a first, the restructuring option has been extended to retail borrowers as well, given that many of them may face challenges in servicing debt owing to salary cuts and job losses, CRISIL said in a statement on Monday. The major beneficiaries will be sub-Rs 500 crore corporate and retail loan accounts that have debt at risk worth Rs 3 lakh crore, CRISIL stated after analysing around 14,000 companies that constitute over 75 per cent of the overall corporate portfolio of banks. Debt at risk is defined as loans that can turn into NPAs this fiscal unless restructured by banks.
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“Last time, the NPAs came primarily from bigger, chunkier accounts, whereas this time, an analysis of the top 100 exposures of our large, rated banks reveals that following a period of consolidation and deleveraging, these entities are likely to be better-positioned to withstand the current challenges. The key beneficiaries of the RBI’s measures, though, will be small and mid-sized accounts, which are far less resilient in the current situation,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings.
In its credit profile analysis of exposures above Rs 25 crore, CRISIL found that debt at risk in corporate loan accounts with exposure less than Rs 500 crore is approximately Rs 2 lakh crore. To put things in perspective, this amount is around five times the debt at risk in larger corporate loan accounts.
In case of retail loans, home loans face less risk as the largest secured segment, considering “the psychological attachment of Indians to the homes they live in, and the priority they accord to repaying home loans,” CRISIL said. The unsecured segments were however do not have this enjoy this assurance, the ratings agency said. The total debt at risk in the retail segment is estimated to be approximately Rs 1 lakh crore, it further added.
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In MSME segment, NPAs are unlikely to see much rise in comparison to the March 2020 levels due to the three-month extension in the ongoing restructuring scheme and the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme, the agency stated.
“While the RBI measures will cushion the rise in NPAs, implementation is key, as are individual banks’ policies on extending these relaxations to customers,” said CRISIL Director Subha Sri Narayanan. “For corporate loans, given the requirements of participation by lenders having 75 per cent of exposure by value and 60 per cent by number, and independent credit assessment by a credit rating agency, as well as the stringent timelines for invocation and implementation, we are likely to see banks being selective in extending restructuring. On the retail side, banks could follow different paths, with the well-capitalised ones choosing to recognise more of the stressed loans as NPAs rather than restructuring these.”