By- Akshay Gurnani
The banking sector is pushing for a moratorium on loan repayments by another three months to August 31, easing of bad loan recognition norm from 90 days to 180 days and one-time restructuring of loans as relief measures to tackle the impact of lockdown and the slowdown in the economy due to COVID pandemic.
With lockdown now getting extended up to May 31 and possibility of further extension not ruled out in some key states, the Reserve Bank of India (RBI) may have to extend the moratorium on loan repayments by another three months to August 31, bankers and analysts said. Several banks, including Axis Bank, and NBFCs have also demanded a loan restructuring scheme as moratorium alone is not sufficient to come out of the crisis situation. These demands were raised at the recent meetings of the RBI top brass with the chiefs of banks and NBFCs, sources said.
However, bankers are not sure whether RBI will change its ‘June 7 circular’ concept on stressed assets and restructuring. RBI’s Prudential Framework for Resolution of Stressed Assets June 7 circular — mandates banks to recognize stress, and initiate a review of default within 30 days.
According to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, the RBI needs to give operational flexibility to banks for a comprehensive restructuring of the existing loans and also a reclassification of the 90-day norm. As of now, the June 7 circular is stringent and gives little flexibility to banks. The RBI needs to clarify whether enhanced working capital loans classify as COVID debt, he said.
Currently, loans in which the borrower fails to pay principal and/ or interest charges within 90 days are classified as non-performing assets (NPAs) and provisioning is made accordingly. Some banks, which are hopeful of an economic recovery, want this to be raised to 180 days to limit the surge in NPAs.
Worried over rising bad loans, bankers are veering around to the idea that extension of moratorium is required as factories are unlikely to start production in May in view curbs in many important industrial belts, supply chains remain broken and job losses have increased. However, the extension means a delay in payment, and borrowers will have to shell out the installments and interest charges later. Banks are already facing sluggish credit offtake and a spike in non-performing assets due to the lockdown and the contraction in the economy.
On extending the moratorium beyond May 31, the Chairman of a nationalized bank said, “wait till May 31 and then see that what is the demand or what is the situation and depending upon the situation on the ground, I think these are the things which the RBI can take a view and take a calibrated approach. I think the next view probably will be taken after May 31.”
On March 27, the RBI announced a three-month moratorium (March 1 to May 31) on loan and card repayments and slashed its main policy rate — Repo rate by 75 basis points and cash reserve ratio (CRR) of banks by 100 basis points to stabilize the financial markets and reduce the pain on borrowers hit by Covid-19 pandemic.
“With the lockdown now extended up to May 31, we expect RBI to extend the moratorium by 3 months more. This will imply companies need not pay till August 31, and it will imply the almost minimal possibility of companies being able to service their interest liabilities than in September, failing which the account might be classified NPA as per extant norms,” Ghosh said.
Rating firm Crisil said NPAs are set to rise by 150-200 basis points this fiscal. “Lockdown will impact collections and resolutions and thus result in higher NPAs. The gross NPA would be between 11-11.5 percent for the base case and it could rise higher,” it said.
The RBI had stipulated banks should create a 10 percent provisioning on all loans that are overdue but not yet a non-performing asset and where a moratorium has been approved. While the provisioning could be adjusted against the provisioning for slippages in NPAs during fiscal 2021, the banking sector’s ability to manage asset quality in the near term post the moratorium period remains a critical factor. “As per our estimates, the RBI’s stipulation on additional provisioning requirements could increase the total provisioning of banks by Rs 35,000 crore in the March-June 2020 period,” said Vydianathan Ramaswamy, Director, Brickwork Ratings.
In the retail segment, higher instances of moratorium utilization were observed in Agri loans, micro-credit, CV loans, and other unsecured retail products like credit cards. For most banks, a higher proportion of the retail book appears to be under moratorium. Several borrowers opting for a moratorium had sufficient account balances or undrawn lines indicating that borrowers want to be more liquid (at a cost, of course), according to HDFC Securities.