The Reserve Bank of India (RBI) and the government discussed the Basel regulatory capital framework and restructuring scheme for stressed micro, small and medium enterprises in its marathon 9-hour meeting on Monday.
The RBI was able to retain the prudential Tier 1 capital requirement for the banking sector at 9 percent and reduce the regulatory capital that banks have to keep by 0.625 percent. The deadline for keeping that balance 0.625 percent of capital conservation buffer has been extended till April 2020 from March 31, 2019.
But is this something that will disturb rating agencies or rival banks who open letter of credit (LCs ) with Indian banks? Srikanth Vadlamani, VP-financial institutions group at Moody's Investors Service, shared his views and readings on the same.
Vadlamani said, "For banks, the more the capital the better it is and the Indian public sector banks are weakly capitalized. So the fact that in some sense forbearance been given on the capital level is a credit negative."
“The broader point to be kept in mind is that we need to make a distinction between the regulatory minimums and the capital level that banks typically maintain,” he added.
On MSMEs, the RBI said that it would consider a scheme for a restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore.
Talking from a rating agency’s perspective, he said, “More details are awaited on micro, small and medium enterprise (MSME) restructuring. The issue is not on whether it should be restructured or not but on classification. If something that was supposed to be non-performing loan (NPL) that is seen as NPL in other jurisdictions is seen as not NPL in this jurisdiction because of this forbearance.”
With regards to NPL classification and how that will impact the ratings, Vadlamani said, “I think that would be credit negative from two perspectives. One is from accounting perspective maybe not much of a difference because probably external analyst will add that back to stock of NPLs and say this is an actual picture of NPL rather than what has been reported but the second important point is that I am not sure, at least from the experience of last 5-6 years we have seen that most of the restructured loans have slipped into NPLs. Therefore, I am not sure if not classifying a particular loan which has passed its due as not NPL. I am not sure how helpful that would be when we look at it in the medium-term but having said that we will await for details on exactly what are the terms of restructuring and what a criteria this will be allowed."