Covid loan recast. Third wave could revive the demand for restructuring of loans: ICRA

The threat of the third wave of Covid-19 risks banks’ asset quality, especially the restructured loan book, cautioned ICRA.

The third wave could revive the demand for the restructuring of loans, including already restructured loans, the credit rating agency said.

Anil Gupta, Vice President – Financial Sector Ratings, ICRA, said: “With the increased spread of the new Covid-19 variant, i.e. Omicron, there is a high possibility of the occurrence of a third wave.

“As banks restructured most of these loans with a moratorium of up to 12 months, this book is likely to start exiting the moratorium from Q4 (January-March) FY2022 and Q1 (April-June) FY2023.”

Therefore, a third wave poses a high risk to the performance of the borrowers that were impacted by the previous waves and hence poses a threat to the improving trend of asset quality, profitability, and solvency, he added.

The agency noted that Banks have implemented about 83per centof the total requests (76per centfor Public Sector Banks/PSBsand 86per centfor Private Sector Banks/PVBs) received under Covid 2.0, leading to an overall restructuring of ₹1.2 lakh crore of loans till September 30, 2021.

Per its assessment, as the restructuring requests can be implemented till December 31, 2021, incremental restructuring could increase by 15-20 basis pointsfrom the current levels. One basis point equals 0.01 per cent.

“The third wave could revive the demand for the restructuring of loans, including loans which were already restructured. In such a case, visibility on the performance of the restructured loan book, which was earlier expected in FY2023, may now be expected in FY2024 as the moratorium on the existing restructured loans could be extended,” opined Gupta.

ICRA noted that with incremental restructuring under Covid 2.0, the overall standard restructured loan book for banks increased to 2.9per centof standard advances as of September 30, 2021 (2per centas of June 30, 2021).Most of this restructuring includes borrowers impacted by Covid 1.0 and 2.0.

The agency assessed that restructuring under Covid 1.0 is estimated at 34per cent(or ₹1lakh crore) of the total standard restructured loan book of Rs. 2.85 lakh crorefor banks as of September 30, 2021, while restructuring under Covid 2.0 is estimated at 42per centor ₹1.2 lakh crore. The balance comprised micro, small & medium enterprise (MSME) and other restructuring.

Moreover, as per ICRA’s estimates, 60per centof the total restructuring of ₹1lakh croreunder Covid 1.0 was accounted for by corporates and the balance (or . ₹40,000) by the retail and MSME segments.

“Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers, stood at 3timesof the restructuring under Covid 1.0.

“The absence of a moratorium on loan repayments, as announced by the Reserve Bank of India (RBI) during Covid 1.0, drove higher restructuring under Covid 2.0,” the agency said.

ICRA opined that public sector banks (PSBs) were relatively more accommodative with the restructuring requests of borrowers as their restructured books stood at 3.2per centof the standard advances vis-à-vis 2.2per centfor private sector banks (PVBs).

“The restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Limited (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the last three years,” per the agency..

As a result, despite the elevated gross slippage rate of 3.2per centin Q2 (July-September) FY2022 (3.5per centin H1/April-SeptemberFY2022 and 2.7per centin FY2021), the gross and net non-performing advances (NPAs) remained on a declining trend.

ICRA assessed that the slippage rate and repayment rate were much higher for PVBs than PSBs, which possibly means that the moratorium period offered by public banks is likely to be higher than that provided by PVBs.

This could also be interpreted from the lower level of dual restructuring of loans (that is,loans restructured under Covid 1.0 getting restructured again under Covid 2.0) for public banks as a longer moratorium would have obviated the need for second restructuring.

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