Money & Banking

Banks to restructure up to ₹8.4-lakh cr of total loans: Ind-Ra

Our Bureau. Mumbai | Updated on August 19, 2020

Ind-Ra remains cautious over the tightening market conditions, which could have an impact on funding sources

India Ratings (Ind-Ra) has estimated that around 7.7 per cent (₹8.4-lakh crore) of the total bank credit as of March-end 2020 from corporate and non-corporate segments could get restructured under the recently announced resolution framework (loan restructuring guidelines) for Covid-related stress.

While this framework would provide banks with an opportunity to keep viable accounts as standard in their books, Ind-Ra warned that the restructuring announcements in the past (FY8 to FY11 and FY13 to FY19) had raised concerns about the efficacy of the restructuring mechanism, as most of the restructured assets had eventually slipped into the non-performing asset (NPA) category.

“While the 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 on a significant revival in the economy,” said Karan Gupta, Associate Director.

The credit rating agency cautioned that the restructuring could be higher if restructuring in non-corporate segments (retail, agriculture, micro, small and medium enterprises) exceeds 1.9 per cent of the total bank credit.

Ind-Ra estimated that almost 60 per cent of the ₹8.4-lakh crore was already susceptible to slip into the NPA category post lockdown the in absence of restructuring.

Corporate, non-corporate restructuring

As per Ind-Ra’s bottom-up analysis of corporates segregated into 35 sectors and recovery curve framework, along with the expectation of a sharp decline in GDP for FY21, the restructuring quantum from the corporate sector in FY21 could range between 3.0 per cent to 5.8 per cent (₹3.3-lakh crore to ₹6.3-lakh crore) of the banking credit.

Even stressed assets that may not slip in the near term could be restructured as Covid would have aggravated stress, the agency said.

While a high proportion of the debt from the real estate, airlines, hotels and other consumer discretionary sectors is likely to be restructured, Ind-Ra said the largest contribution would be from infrastructure, power and construction.

The agency expects at least ₹2.1-lakh crore (1.9 per cent of banking credit) of the non-corporate loans to undergo restructuring, which would have otherwise slipped into NPA.

Temporary breather

Ind-Ra estimates the provisioning requirement could reduce by around 10 per cent on the restructured pool in FY21 from its earlier expectations on loans that could have turned NPAs.

As the tenor for the restructured loans can be extended for a maximum of two years, the credit cost impact in accounting terms could be benign in FY21 and FY22.

The agency has lowered its provisioning estimates for FY21 by 16 to 17 per cent to 2.3 per cent for the banking system (2.6 per cent for public sector banks and 1.8 per cent for private sector banks) from previous estimates.

Published on August 19, 2020

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