Banks can restructure loans of more than 10 trillion rupees largely attributed to 5-6 critical sectors, including aviation, commercial real estate and hospitality, which have been badly affected by the Covid-19 outbreak, according to the bankers.
Finance Minister Nirmala Sitharaman last week asked banks and NBFC to implement a one-time loan restructuring scheme for Covid-19-related stress by September 15.
According to a senior official at a public sector bank, both lenders and borrowers are win-win.
Explaining the rationale, said the banker, companies will try to prevent their business from becoming nonperforming assets (NPA) and will gain crucial time to recover cash flow for debt service.
Second, banks only have to make a 10 percent provision against the restructured account compared to 15 percent if the same account is converted to an NPA, the official said, adding that the appeal of conserving capital The 5 percent will also push banks to recast.
Given the benefit, the official said, it is estimated that 12-15% of the total loan book would benefit from a one-time restructuring.
Micro, small and medium-sized enterprises (MSMEs) are already covered by the ongoing restructuring scheme that was recently modified to cover those affected by the Covid-19 crisis.
It should be noted that there is an outstanding loan in the banking system for a total value of Rs 100 trillion.
Another bank official said that nearly half of the 30 percent of the total loan book that requested a moratorium, which ended on Aug. 31, can benefit from the restructuring.
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Businesses from roughly half a dozen vulnerable sectors – hospitality, aviation, entertainment, commercial real estate, and travel and tourism – whose businesses have been severely affected due to the Covid-19 crisis will head straight for the plan.
The KV Kamath committee report is expected to provide financial parameters such as haircut, debt service coverage ratio, post-resolution debt-to-equity ratio, and interest coverage ratio for the recast of corporate loans for more than half a dozen vulnerable sectors, the official added.
Last month, the managing director of the National Bank of Punjab, SS Mallikarjuna Rao, said that around 5 to 6 percent of the loan book would go to restructuring according to the guidelines approved by the RBI.
This 5-6 percent is equivalent to approximately Rs 40 billion. The main makeup of this, about 50 percent, would be corporate books, he had said.
Echoing similar views, Resurgent India Managing Director Jyoti Prakash Gadia said that around 5 percent of the loan portfolio would go to restructuring on the conservative side.
With stricter rules for debt reform announced by the Reserve Bank, the likely restructuring of banks will be around 5 to 8 percent of their total loan portfolio, according to a report by rating agency ICRA.
Last month, the RBI allowed the one-time restructuring of corporate and retail loans without being classified as non-performing assets (NPA). The restructuring benefit can be used by those whose account was standard on March 1 and the default values should not exceed 30 days.
The RBI also established some rules for the implementation of a resolution plan that included the eligibility of only borrowers of special mention accounts 0 (SMA-0) as of March 1, 2020, independent credit assessment (ICA), superior provision , among others. SMA 0 accounts are those in which the payment of interest and principal is due for 1 to 30 days.
With relatively stricter loan restructuring rules, such as SMA-0 borrower-only eligibility as of March 1, 2020, independent credit assessment (ICA) of resolution plans (RP), and higher initial provisioning requirements, we expect loan restructuring of about 5-8 percent of total loans, according to the report released last month.
Resolution plans to be implemented under the framework may include converting any accrued or unearned interest to another credit facility, or granting a moratorium and / or rescheduling repayments, based on an assessment of the flows. of borrower income up to two years.
While resolution in this framework can be invoked until December 31, 2020, lenders have been encouraged to strive for early invocation in eligible cases, particularly for personal loans.
According to the August India Ratings and Research report, banks are likely to restructure up to Rs 8.4 trillion in loans, or 7.7% of overall system credit, under the recast package.
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