Proposal allowing loan restructuring to extend uncertainty over banking sector’s asset quality: Fitch

By Sarkaritel August 12, 2020 07:43

New Delhi, Aug 12  The RBI’s proposal to allow banks to restructure loans will extend uncertainty over the sector’s asset quality, said Fitch Ratings.

According to Fitch Ratings, the policy could open a window for banks to build capital buffers while putting off full recognition of the coronavirus pandemic’s impact on loan portfolios, but is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks.

The proposals extend to end-March 2021 a programme allowing rescheduling of most retail and corporate loans, including micro enterprises and SMEs (MSMEs) that were not impaired prior to March 1, 2020.

The rescheduling may take a number of forms, including moratoriums and extensions of loan tenors of up to two years.

“Fitch believes that the scheme may be designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios,” the statement said.

“We pointed out recently that a number of Indian banks — both state-owned and private — have announced capital-raising plans, but that for state banks these moves were likely to be insufficient to mitigate anticipated risks without further capital support from the state,” it added.

As per Fitch’s analysis, most state banks would struggle to maintain a 6.125 per cent common equity Tier 1 (CET1) ratio under a high-stress scenario.

“Raising capital remains challenging in the current environment. However, the new policy will reduce transparency over asset quality, which could further hinder some paths for capital-raising,” the statement said.

“Private investors, for example, may be more reluctant to participate in sales of stakes in state-owned lenders until the impact of the pandemic on their balance sheets is clear,” it added.

Accordingly, Fitch Ratings said that delaying recognition of problems in the banking sector could provide some short-term support to economic growth by stimulating credit issuance.

“The RBI has also raised the loan-to-value cap on credit issued against gold from 75 to 90 per cent, in its efforts to boost lending.

“However, many state banks may remain reluctant to lend to all but the most creditworthy borrowers in the near term, as their overall weak capital position remains unsupportive of growth – even with impaired loans permitted to be classified as ‘standard’ after rescheduling,” it said.

Besides, Fitch Ratings pointed out that India’s 2010-2016 experience with permitting broad-based debt restructuring was characterised by poor implementation and weak monitoring.

“The central bank has looked to address this concern by tightening supervision, for example through an ‘Expert Committee’ which will vet all restructuring plans involving creditors with more than INR15 billion (USD200 million) of debt,” the statement said.

“However, this does not address the issue of oversight for most retail and MSME lending restructured under the programme,” it said.

In Fitch’s view, these categories will account for a substantial portion of the future asset-quality stress linked to the pandemic.

“There is also a risk that the restructuring policy could undermine the insolvency and bankruptcy code, established in 2016, by side-lining the legal process that it set up,” it said.

By Sarkaritel August 12, 2020 07:43