India’s central bank unveiled a debt restructuring scheme for pandemic-hit businesses to try to avert a surge in bad debts as the economy reels from the impact of the coronavirus pandemic.
Shaktikanta Das, governor of the Reserve Bank of India, warned of “significant financial stability risks” from the health crisis as he announced banks would be permitted to restructure debts of companies without formally reclassifying the adjusted loans as stressed assets.
The RBI had warned last month that bad debts at Indian banks could rise to as much as 14.7 per cent of total assets, up from 8.5 per cent, by next March, as India’s economy is pummelled by a pandemic continues to spread.
Coronavirus has killed more than 40,700 Indians and more than 50,000 new infections are being detected every day. India has more than 1.9m confirmed cases, the third-highest burden in the world after the US and Brazil.
Although a nationwide lockdown imposed in late March has been eased, the economy remains severely disrupted, with states imposing localised lockdowns and other restrictions.
India’s gross domestic product is expected to contract significantly this year, with analysts predicting it will shrink by 5-7 per cent and some credit rating agencies forecasting a drop of more than 9 per cent.
“The disruptions caused by Covid-19 have led to heightened financial stress across the board,” Mr Das said.
“This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread,” he added.
The Bombay Stock Exchange closed up nearly 1 per cent.
HSBC said in a note the move was “necessary to avoid preventable bankruptcies”.
“If credit-constraints make viable firms go out of business, the resulting supply shock could stock inflation,” it said.
Aurodeep Nandi, India economist at Nomura, the investment bank, said the restructuring scheme would “allow breathing space to both lenders and borrowers and allow a post-pandemic repayment schedule to shape up”.
But warned it may simply be a way to postpone the inevitable pain of banks having to recognise that some borrowers may never recover.
“India has tried this medicine before,” he said. “It ultimately led to the ball on bad loans to be rolled down the road until there was no more road left.”
Mr Das acknowledged India’s previous experience of using regulatory forbearance, when bad loans were repeatedly restructured, and said the RBI planned to set strict criteria for the new scheme.
The RBI said only loans classified as standard as of March 1 — before the pandemic hit India — would be eligible for restructuring with a view to ensuring there would be no reprieve for companies that were already struggling.
The RBI has also appointed a committee, led by veteran banker KV Kamath, to lay out other principles for the scheme, including safeguards, entry norms and post-restructuring monitoring.
The RBI had announced a debt moratorium shortly after India went into lockdown, which has been extended to August 31. However, lenders have warned many good borrowers will struggle to repay loans once the moratorium ends.
Ritika Mankar, a consulting economist with Ambit Capital, said the scheme could bolster banks’ confidence so they start lending a time when they are flush with liquidity but highly risk-averse. “Bank credit growth is really weak,” she said. “It’s not as if banks don’t have the money to lend. The problem is there is no desire to lend.”
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