India Ratings<\/a> also agrees that the loan restructuring was a vital move because given the situation that we are in if this was not done then a significant portion of these assets would have slipped into GNPAs. And then banks would have made provisions \u2014as the mandatory requirement is 15% \u2014 and on an average banks make around 20% provisioning on these assets.<\/p>\n\u201cThe provisioning requirements would have gone up and then would have impacted their capital thereafter. This dispensation reduces the provisioning requirement and hence the capital requirements. Private banks have already set on decent capital buffers and have also been raising equity capital. And they would not be that impacted by this but the public sector banks would have faced challenges on that front. Then the government would have to put in money, which in the current fiscal situation would be an additional burden. With the restructuring being in place, slippages to GNPA will be lower and provisioning requirements will also go down,\u201d Gupta told ETBFSI.<\/p>\n
However, they argue that two important factors will determine the success of loan restructuring.<\/p>\n
At banks\u2019 discretion! <\/b>
The former deputy governor of the Reserve Bank of India expressed his concerns with the banks not being quick in providing timely relief. <\/p>\n
\u201cRBI has provided a structure, but my worry is that lenders might not move fast enough and do not coordinate with each other quickly to provide and to provide timely relief. Because the relief has been announced now if it is delayed by six months or one year it is as good as not being given in the first place. By then the enterprise would die in any case. No regulator can force anyone. But it is in the hands of the lenders to negotiate, to sort out and sign the ICA (inter-creditor agreements) without further delays. It is in the larger interest of everyone.\u201d<\/p>\n
Mundra, however, added that with too many institutions involved some delays are expected but also that he is hopeful for these things to be ironed out soon.<\/p>\n
Economic (de)growth<\/b>
RBI\u2019s resolution framework for COVID-19-related stress aims to provide banks with an opportunity to keep viable accounts as standard that otherwise would have turned into non-performing assets (NPAs) given the increasing economic stress. <\/p>\n
Rahul Gupta asserts that the success of the resolution of these accounts will depend as much on the revival of the economy.<\/p>\n
\u201cThe restructuring announcements in the past had raised concerns about the efficacy of the restructuring mechanism, as most of the restructured assets had eventually slipped into NPAs. While RBI 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 upon a significant revival in the economy,\u201d Rahul said.<\/p>\n
Ind-Ra in its report dated August 19 has estimated around 7.7% (Rs 8.4 trillion) of the total bank credit at end-March 2020 from corporate and non-corporate (retail, agri, micro, small and medium enterprises) segments could get restructured under the current resolution framework.<\/p>\n
\u201cIt could be higher if restructuring in non-corporate segments exceeds 1.9% of the total bank credit. We estimate that almost 60% of Rs 8.4 trillion was already susceptible to slip into the NPA category post lockdown, in absence of restructuring,\u201d the report added.<\/p>\n
That said, depending upon what sector the company belongs to and how the demand picks up will be important to watch. A company\u2019s own resilience and strength in the balance sheet will also play a big role. There will be some winners and some losers.<\/p>\n<\/div>\n