One-time loan restructuring dilemma - RBI won’t commit, and India Inc won’t stop asking for it

• Finance Ministry and the RBI are mulling the option of a one-time restructuring of loans across all sectors
  
• RBI in the past has been uncomfortable with the practice calling it ‘deceptive banking’ and is afraid that a one-time restructuring would open up the floodgates.
  
• The Confederation of Indian Industry (CII) is pushing for the reform with some guidelines that may address the RBI’s concerns.
  

All eyes will be on the upcoming monetary policy to find out whether the Reserve Bank of India (RBI) will allow a one-time loan restructuring and how. This topic has been widely debated and is being ‘actively’ discussed as an option by the Finance Ministry. Even as the RBI remains moot on the topic, juggernauts like Uday Kotak and Deepak Parekh continue to ask for industry-wide relief.

RBI’s dilemma is choosing between what former governor Raghu Rajan once called “deceptive banking” or the second option, which is the banking system putting its provisions to use once the moratorium ends on August 31.


The apex bank’s own stress tests show that the level of bad loans or non-performing assets (NPAs) could be anywhere from 12% to 15% by the end of the year. Abizer Diwanji, EY India’s financial services leader told Business Insider that this may leave the RBI with little choice.


“Given that, every industry across the country has been impacted, even those industries which had defaulted before COVID happened — there the chances of revival are near zero even in the post-COVID situation,” he said.

To NPA or not to NPA
As of right now, there is nothing stopping banks from restructuring accounts. The catch is that they need to declare the account as a non-performing asset first. However, declaring an account NPA would also require a bank to set aside 15% of the loan value to cover the default risk.

Higher levels of NPA mean more provisioning and that means more demand for capital. “When there is capital inadequacy in the market, banks lose trust. When banks lose trust, deposits drain out. When deposits drain out there is a liquidity problem. That is the traditional cycle that banking follows,” explained Diwanji.


For a large-scale one-time restructuring, industry bodies are asking that accounts not be declared NPA. If an account isn’t declared an NPA, it’s good for the bank’s balance sheet and the borrower is likely to see more incremental funding. “The reclassification of the NPA is not to hide something, it is more to enable the cycle to start again,” said Diwanji.

However, RBI has issues with this approach being used to show higher profits to fetch better valuation in the stock market.

Everyone will want a piece of the pie
The one-time restructuring would also open the floodgates to every account wanting a way out of their existing payment plan. If a borrower is likely to get only one chance at restructuring their loan, they’re likely to be more conservative about their recovery estimate — ie. one year to recover in a pre-COVID world versus five years to recover post-COVID, according to Diwanji.

Here’s what the Confederation of Indian Industry (CII) proposes:

• Funding only for ‘holding on operation’ basis. Banks will only give enough money for the entity to survive, not grow.
  
  
• If at least 15% of the restructured loan is not paid — either through operations or refinancing — within 18 months, the account will get classified as NPA.
  
  
• Any new money given by the banks as part of the restructuring should be a priority — it has precedence over all other obligations of the company.
  
  
• Get rid of all the bureaucratic processes that are there for restructuring — agency ratings, forensic audits, and valuations — because everything is uncertain in the post-COVID scenario.
  

“There is a growing view across the membership for a one-time restructuring,” said Uday Kotak during RBI Governor Shaktikanta Das’ address to CII National Council members.

The clamour for loan restructuring is growing louder because the bankers are not in favour of extending the moratorium period. It remains to be seen whether the Reserve Bank of India will provide this reprieve in its upcoming policy this week.

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