RBI’s one-time loan restructuring will help soften Covid’s impact on the asset quality of banks

The Reserve Bank of India’s (RBI) move on one-time loan restructuring will help soften the pandemic’s impact on the asset quality of banks, with major beneficiaries being the sub-₹500 crore corporate exposures and retail exposures, according to Crisil Ratings.

The aforementioned exposures were earlier expected to see the highest increase in non-performing assets (NPAs) in percentage terms, the credit rating agency said.

Crisil assessed that the debt at risk in these segments or loans at risk of slipping into NPAs this fiscal unless restructured by banks is a sizeable ₹3-lakh crore (about ₹2-lakh crore in corporate loan accounts with exposure less than ₹500 crore and about ₹1-lakh crore in the retail segment).

“Sans this (one-time loan restructuring), gross non-performing assets (NPAs) could have touched a two-decade high of 11.5 per cent by the end of this fiscal, but will now likely print considerably below that level,” the agency said.

The central bank has permitted relaxations for corporate loans under the June 2019 Prudential Framework on Resolution of Stressed Assets. Crisil said these will benefit borrowers in most categories.

“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,” the agency added.

Micro, small and medium enterprises (MSMEs), which have been substantially affected by the pandemic-led disruptions, have also got relief in the form of a three-month extension in the existing restructuring scheme till March 31, 2021.

Krishnan Sitaraman, Senior Director, said: “In the corporate segment, the situation today is different from the previous asset quality stress cycle, which started four years ago.

“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

Sitharaman opined that 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.

Crisil said its analysis of the credit profile of banking sector exposures over ₹25 crore bears this out.

The study, covering about 14,000 companies that constitute over 75 per cent of the overall corporate portfolio of banks, shows that the debt at risk in corporate loan accounts with exposure less than ₹500 crore is about ₹2-lakh crore.

As a proportion of loans outstanding in this segment, it is about five times that for larger corporate loan accounts with exposure more than ₹500 crore.

A safe haven for banks

Further, the retail segment, which was considered a safe haven for banks in recent years, is witnessing significant pressure, given the stress being faced by salaried as well as self-employed borrowers.

While home loans, the largest secured segment, would be less at risk owing to the psychological attachment of Indians to the homes they live in, and the priority they accord to repaying home loans, this does not hold for segments such as unsecured loans. Crisil assessed that the total debt at risk in the retail segment is estimated to be about ₹1-lakh crore.

The agency said asset quality in the MSME segment, which is among the most vulnerable, is already benefiting from the restructuring scheme that was in force till December 31, as well as measures such as the ₹3-lakh crore Emergency Credit Line Guarantee Scheme.

With the proposed extension of the restructuring scheme, the reported gross NPA for the segment is, therefore, unlikely to see much of an increase vis-à-vis March 2020 levels, it added.

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