Banks likely to restructure loans up to Rs 8.4 lakh crore; here’s what to learn from past

bank loans, restructuring, refinancing, NPA, GNPAThe provisioning required by banks under the restructuring framework is lower, compared to the normal slippages into GNPA.

Bank loans worth up to Rs 8.4 lakh crore are likely to be restructured by banks under the recently announced resolution framework for alleviating the Covid-19 related stress. Out of the overall loans set to be restructured, almost 60 per cent of them were susceptible to slip into the NPA category post-lockdown, in absence of restructuring, said a report by India Ratings. It added that the provisioning required by banks under the restructuring framework is lower, compared to the normal slippages into GNPA. While the large-scale restructuring of loans would provide banks with an opportunity to keep viable accounts as standard in their books, the provisioning requirement are expected to reduce by around 10 per cent on the restructured pool in FY21 from its earlier expectations on loans that could have turned NPAs.

India Ratings’ estimates showed that around 7.7 per cent of the total bank credit at end-March 2020 from corporate and non-corporate (retail, agri, micro, small and medium enterprises) segments could get restructured under the current framework. It also underlined the possibility of even higher restructuring in the non-corporate segments. Even as the estimates show a decreased provisioning requirement and the clean book of accounts due to restructuring, the failures of past is overshadowing the relief.  

The restructuring announcements in the past (FY08 – FY11 and FY13 – FY19) had raised concerns about the efficacy of the restructuring mechanism, as most of the restructured assets had eventually slipped into NPAs. While Reserve Bank of India has put in place several guardrails this time around in the form of defined timelines and external vetting, the success of the dispensation will still largely depend upon a significant revival in the economy. 

Meanwhile, after the Monetary Policy Committee meeting, RBI Governor Shaktikanta Das announced a one-time restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the Covid 19 pandemic. He added that the central bank will also form an expert committee headed by former ICICI Bank CEO KV Kamath to suggest ways in which the restructuring will be implemented. In an interesting note, the RBI Governor mentioned that care will be taken that past experience of restructuring is not repeated and enough safeguards will be followed. 

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