Restructured loans: banks want RBI to extend special classification deadline

Continued pressure on the asset quality front has prompted banks to request the Reserve Bank of India to extend the deadline for withdrawing the special asset classification benefit for all restructured loan accounts.

The central bank last year said the special asset classification benefit will be withdrawn for all loan restructuring cases with effect from April 1, 2015.

Hitherto, the RBI allowed regulatory forbearance on asset classification of restructured accounts, whereby standard accounts were allowed to retain their asset classification and accounts classified as non-performing were allowed not to deteriorate (downgrade) further in asset classification on restructuring.

With the economy not yet showing signs of a turnaround, bankers feel that withdrawal of the special asset classification benefit will lead to restructured loan accounts getting downgraded with effect from April 1, 2015, requiring banks to set aside more cash (provision) to pay for the losses anticipated in the future.

Currently, the provision requirement on restructured loan accounts is 5 per cent. But come April 1, 2015, when the restructured loan accounts will get downgraded (to the non-performing asset or NPA category), the provision will go up to 15 per cent.

The increased provisioning will weigh on banks’ profitability from the first quarter (April-June) of FY 2016 onwards.

Hence, banks want the special asset classification benefit extended for a year, hoping that the restructured loan accounts can be nursed back to health during this period on expectations that the economy will improve.

“A rising tide lifts all the boats. So, once the economy gains momentum, the fortunes of the restructured loan accounts will change for the better.

“However, if the RBI doesn’t relax the April 1 deadline for withdrawing the special asset classification benefit for restructured loan accounts then within the stressed assets, banks’ gross NPAs will rise while the restructured loans will go down,” said a senior public sector bank official.

This will impact banks’ bottomlines as they will need to make higher provisioning towards NPAs, he added.

According to the RBI’s latest financial stability report, the gross non-performing advances (GNPAs) of scheduled commercial banks as a percentage of the total gross advances increased to 4.5 per cent in September 2014 from 4.1 per cent in March 2014.

COMMENT NOW