Indian banks agreed to recast loans worth Rs 1 trillion under a central bank scheme, significantly lower than what was originally anticipated, signaling an improvement in borrowers’ repayment capability amid a rebound in economic activity. Although many such loan accounts may turn sour, things are likely to be better than the last round of forbearance after the global financial crisis, given that only about 1 per cent of banks’ loan books are up for recast, a fraction of what was initially estimated by credit analysts.
The Reserve Bank of India’s (RBI) one-time debt recast framework was aimed at helping stressed borrowers dodge pandemic-related defaults by allowing them to defer payments, among other steps. So far, 16 private and public sector banks have disclosed the quantum of loans they have approved under this program.
However, the majority of the Rs 1 trillion worth of loans are to be restructured as banks have time till 31 March for retail and small business loans, and till 30 June to implement requests from the corporate sector.
Restructuring of loans may include extending the repayment period and lowering interest rates, coupled with a moratorium to help the struggling borrower manage cash flows better.
“We are taking a pragmatic approach when it comes to restructuring requests, and we are cognizant of the issues corporates have faced,” State Bank of India (SBI) chairman Dinesh Khara said at a press conference on 4 February.
India’s largest lender, SBI, has approved a recast of Rs 18,125 crore worth of loans, most of them from the corporate sector. While the bank has the largest share in debt recasts among its peers owing to the size of its loan book, they are only about 0.73 per cent of its total loans. The primary benefit for banks under this program is that it does not require them to set aside NPA-like provisions for such loans.
When RBI allowed banks to recast loans without classifying them as bad in August, experts estimated that 5-8 per cent of all loans would be recast. Rating agency Icra Ltd in December slashed its estimates to 2.5-4.5 per cent, which now seems to be higher than what banks are currently reporting. For instance, a large state-owned bank like Punjab National Bank (PNB) expected that it would receive restructuring requests of up to Rs 40,000 crore, but the bank has agreed to recast loans of only Rs 11,998 crore.
“Of this, Rs 9,000 crore was for corporates, which we have already invoked before 31 December. Requests for restructuring have not been as (many as) we expected,” S.S. Mallikarjuna Rao, chief executive of PNB, said on 6 February.