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Lenders seek RBI nod to recast over $40 bn potential NPAs
Photo Credit: Reuters

Lenders have sought permission from the Reserve Bank of India (RBI) to restructure loans worth Rs 3 trillion ($40 billion) given to companies in stressed sectors such as aviation, hospitality and tourism and commercial real estate fearing a rise in bad loans.

This accounts for more than 2.5% of the total loans worth Rs 91.53 lakh crore ($1.2 trillion) in the banking system, said a senior executive at State Bank of India, asking not to be named.

This comes at a time when the government has also allowed suspension of cases being filed under the Insolvency and Bankruptcy Code, a potent recovery mechanism for banks so far.

“Banks are going to suffer a major hit on repayments from corporates. We are going to witness substantial slippages of loans into non-performing assets (NPAs) despite the moratorium,” SBI executive said.

“The loans will have to be restructured. We also want the government to disallow downgrading those assets. IBA (Indian Banks’ Association) is in talks with the government,” he added.

Restructuring of loans allows banks to modify and ease the terms of a loan when the borrower is facing financial stress to avoid classification of loans as NPAs in case of a default.

When loan defaults, banks also have to set aside a minimum of 15% capital as provisions towards it. This reduces their profitability impacting their balance sheets. 

The outbreak of the Covid-19 pandemic forced a lockdown across the country since March 25, stopping business operations across sectors and restricted movement of airlines globally.

A large number of sectors across regions have not witnessed any activity for over 2 months. This has severely dented the prospects of the Indian economy raising concerns among bankers.

“Lockdown will impact collections and resolutions, and thus result in higher NPAs. The gross NPAs would be between 11-11.5% of the total credit for the base case and it could rise higher,” according to Crisil Ratings.

The rise in bad loans could bring with it capital requirements of $25-50 billion (Rs 1.9-3.8 lakh crore) over two years for lenders, a large part of which is expected to fund provisions, as per a Fitch Ratings estimation.

Gross NPAs were close to Rs 9 lakh crore as of December 2019 and is expected to have crossed Rs 10 lakh crore by March-end.

As of now, the RBI has allowed a moratorium of six months until the end of August, extension from earlier moratorium till May 31. The central bank also announced a standstill on NPA recognition easing the classification of the bad loans.

As per a Care Ratings report, the aviation sector is not expected to fully recover in the current fiscal year and it is expected to be in the red till December 2020. Hospitality & Tourism will remain under pressure for nine months 2020-21 with marginal domestic movement expected in Q4 2020-21.

“Even after lockdown is lifted, leisure travel is expected to be marginal over health concerns leading to distressed domestic travel while foreign travel is estimated to be minimal or negligible for the year impacting the occupancy rates and the average room rates significantly for the industry,” the report said.

It also pointed out that commercial and new residential launches, sales and new leasing will not be able to fully recover by November 2020.

RBI data shows that banks had an exposure of over Rs 2.3 lakh crore to commercial realty, nearly Rs 46,000 crore to tourism and hospitality businesses, and over Rs 30,000 crore to aviation firms at the end of April.

Bank credit growth on a year-on-year basis as of April 24, 2020, at 6.7% was nearly half that of the year-ago period. In addition to slower loan growth, recoveries will further fall, said an official at IBA.

The IBC suspension is expected to significantly lower realisations from assets, by 30-40% for the financial creditors in 2020-21 and poses new challenges, said an ICRA Ratings report.

To assess the progress of the bankruptcy law and emerging challenges, join the fourth edition of VCCircle's Stressed Assets Investment Summit on August 6 on a virtual platform.

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