Stressed loans totalling ₹5.7 trillion may not be eligible for the proposed one-time debt recast aimed at saving borrowers affected by the coronavirus outbreak, three bankers said. These are so-called special mention accounts (SMAs) where repayments were already late by over 30 days on 1 March, Reserve Bank of India’s (RBI’s) cut-off date to be eligible for the new scheme.
While the central bank has allowed a one-time debt recast for SMA-0 accounts—those with payments late up to 30 days—SMA-1 (31-60 days’ delay) and SMA-2 (61-90 days) are not covered.
Since 8.5% of all loans were non-performing at the end of March, total standard loans in India stood at ₹94.9 trillion. Of the total standard loans, 6.03%, or ₹5.7 trillion, are loans with repayments delayed by 31-90 days and, hence, ineligible for recast under the new norms.
Recasting them wouldn’t be possible without classifying them as non-performing assets.
In March, the central bank asked lenders to set aside 10% provisions against SMA-2 loans under moratorium in two tranches.
That apart, there is also a substantial number of loans being resolved under the 7 June 2019 circular on stressed assets beginning last year but have turned bad in the meantime.
“It is good that there are specific entry norms to the recast scheme this time; however, we have already been setting aside provisions for stressed loans. Now, despite provisions, we cannot recast without classifying them as bad, leading to more provisions and capital erosion,” said the chief executive of a public sector bank, one of the three bankers who spoke on condition of anonymity.
Bankers worry that once the moratorium ends on 31 August, SMA-2 accounts may start slipping into NPA category. Other borrowers, they said, will follow if left unresolved.
“September quarter results are unlikely to see a jump in bad loans, except for SMA-2 loan accounts. However, the gradual rise in non-performing loans will begin from the December quarter,” said the second banker cited above.
The Reserve Bank has set up an expert committee led by veteran banker K.V. Kamath to recommend the loan recast parameters and the sector-specific benchmark for this window.
The committee will vet all resolution plans under this window where the aggregate exposure of lending institutions is above ₹1,500 crore.
The bankers said the committee is expected to submit the recommendations by September and, therefore, restructuring packages are unlikely to be implemented before October.
To be sure, the Reserve Bank has allowed lenders and borrowers time till 31 December to agree on the recast plan and another six months to implement it.
Interestingly, banks have been able to reduce their special mention account-1 and special mention account-2 loans over the past year through a combination of recoveries, write-offs and also because some of them slipped into NPA. For instance, India’s largest lender State Bank of India (SBI) had ₹1,750 crore of SMA-1 and SMA-2 loans as on 30 June, against ₹7,266 core on 31 March.
The third banker said that lenders already have a rough list of companies which would require recast, and they will soon formulate internal policies to deal with them.
He said the banks have been closely monitoring loans under moratorium and, therefore, the list of accounts for recast would be among those that have availed of the moratorium but are still under duress.
Industry estimates peg the total quantum of loans coming up for recast at ₹5-8 trillion.
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