Bank debt restructuring to delay bad loans recognition: Fitch

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 Reserve Bank of India’s (RBI) decision to allow restructuring of stressed assets will delay the recognition of bad loans in the banking system, but the conditions wired into the guidelines will help restrict the number of accounts qualifying for the recast window to about 5-8% of outstanding loans, analysts said.

In a report on Monday, Fitch Ratings said 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. At the same time, it is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks, the report said.

“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. 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,” Fitch said in the report, adding that its analysis suggests that most state-owned banks would struggle to maintain a 6.125% common equity tier-1 (CET-I) ratio under a high-stress scenario.

In a separate note, rating agency Icra said that it expects the restructuring of around 5-8% of overall loans as compared to the proportion of loans under moratorium, which may decline to 10-15% of the overall system wide loans by the end of Q2FY21 from 10-60% levels across various lenders during the second phase of the moratorium. Anil Gupta, vice president – financial sector ratings, Icra, said, “Of the estimated 10-15% loans under moratorium, we estimate the slippages for FY2021 at 3-4% of the overall loans of banks (largely the SMA1 and SMA 2 pool as on March 31, 2020), 5-8% could be restructured and the rest 2-3% is likely to result in an increase in overdue categories loans.”

Lenders today are also in a better position due to their past experience in failure of restructured accounts as well as because of enactment of Insolvency and Bankruptcy Code (IBC), Icra said.

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