Mumbai: The RBI on Thursday said it will provide a debt resolution window to enable lenders to implement a resolution plan in respect of eligible corporate exposures as well as personal loans, keeping the ownership unchanged, and without classifying them as non-performing loans.
The central bank also provided a fresh lifeline to millions of stressed small businesses by extending the provision of restructuring of loans.
Analysts said the step was in the right direction and would cover roughly 50-55 per cent of the loans in the banking system. Bankers heaved a sigh of relief as contrary to some expectations, the central bank did not announce an extension of loan moratorium, which was ending on August 31.
“Bankers were against extension of loan moratorium as it was creating instability in the banking system. Also, the smaller NBFCs were not able to raise money to ensure cash flows. For borrowers too, the interest was getting compounded,” said Abhimanyu Sofat, head of research at IIFL Securities.
Governor Shaktikanta Das noted that the disruptions caused by coronavirus have led to heightened financial stress for borrowers across the board.
“A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities,” Das said.
“This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread,” he added.
RBI said it has been decided to provide a window under the June 7, 2019 prudential framework to enable lenders to implement a resolution plan in respect to eligible corporate exposures -- without change in ownership -- as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.
“Various decisions such as no further extension in the moratorium period on loans and increase in the scope of restructuring of loans demarcates RBI’s intention to maintain the integrity of Indian banking sector,” said Jimeet Modi, Founder & Chief Executive, Samco Group.
According to Sofat, the debt recast is a step in the right direction and would roughly allow forbearance for around 50-55 per cent of the loans in the system.. He pointed that providing relief to MSMEs would cover around Rs 28 trillion loans.
In reaction to the RBI policy, BSE Bankex rose 0.51 per cent, while benchmark Sensex was up 0.72 per cent. Leading private lenders HDFC Bank and ICICI Bank were up 0.94 per cent each, while top lender State Bank of India dropped 0.31 per cent
“From a stock perspective, it will be positive for most banks. It will be very positive for Federal Bank NSE 4.19 % and City Union Bank- they have large exposure to MSMEs,” he added.
The “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults and any resolution plan implemented under the framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions.
For this, the RBI has constituted an expert committee, which will make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters to be factored into resolution plans.
The central bank also provided a fresh life line to MSMEs (micro, small and medium enterprises) and said that the stressed borrowers in the segment will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020, and such restructuring will have to be implemented by March 31, 2021.
RBI noted that a restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place, and the scheme provided relief to a large number of MSMEs.
Das said that with Covid-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has escalated, warranting further support.
“This will help in alleviating some of the stress that is likely to emerge as well as address some of the most affected sectors,” said Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities
“The provisioning norms along with rule-based and time-bound resolution plans will likely ensure that banks are prudent in utilizing this window and address genuine stressed cases,” he added.
Arjun Yash Mahajan, head - institutional business, Reliance Securities, said the announcement was positive for banks and he will stick with front line quality names such as State Bank of India in the PSU banking space, and ICICI Bank, HDFC Bank and Kotak Mahindra Bank in the private banking space.