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Why loan restructuring is an unavoidable evil

Why loan restructuring is an unavoidable evil

Why loan restructuring is an unavoidable evil
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By Latha Venkatesh  Aug 10, 2020 7:28:20 AM IST (Published)

Some analysts argue that allowing banks to restructure loans of corporates will lead to opacity in their balance sheets. Bankers ask should we let good airlines, cinema halls and restaurants just die because of the epidemic?

The Reserve Bank’s decision to allow banks to restructure all loans is probably an unavoidable evil. Under the rules announced on Thursday all loans may be extended by two years, but there are strict eligibility criteria, requirement of external validation and penalties and disclosures to ensure only viable loans are structured while those found unviable are recognised and provided.

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The proponents say the RBI's new rules will ensure only the reasonably viable borrowers are helped; critics say no one will truly know how many are viable and how many rotten till two years from now.
For starters, the central bank just had to offer some such a facility given the unusual pandemic. Hotels, airlines, airports, cinema halls are all needed and will most certainly bounce back in two years. Not helping good companies during an unexpected natural disaster was not even an option.
Secondly, the controls are good. Unlike under the corporate debt restructuring mechanism, where debt of any large company with stressed loans was restructured, now only companies that were servicing loans till February will be eligible for restructuring their loan. Also, the loan tenor can be extended by only two years.
The recast plan has to be vetted by an independent KV Kamath panel and a credit rating agency. Any delay in repayment by 30 days will mean the loan will be classified as non-performing, and accordingly provided for.
Banks have to disclose details of value of loans restructured, number of clients who availed of the scheme, provisioning made and how many defaulted.
Despite these safeguards, banking analysts from brokerages Credit Suisse and Macquairie wrote that the restructuring will lead to opacity in bank balance sheets and earnings.
These experts were hoping the extent of hit due to COVID would be known in the September quarters results, as the moratorium granted in May ends by the end of August.
However, with loan tenors getting extended by two years, the extent of COVID victims not be known till 2023. So banks may be overstating their profits this year, say these brokerages.
Analysts also point out that if a company can't pay interest these six months, it will remain too weak to pay compounded interest in the days to come when the economy is still expected to be weak.
This is valid criticism. But bankers say not in all cases. Epidemics age and die and two years from now won’t the country need airlines, airports, cinema halls and hotels?
Also banking industry veterans say many large private banks and even State Bank may be wary of restructuring given that these institutions have just put behind the scourge of non performing loans (NPAs). They will try and take as much of the hit this year, say some watchers.
This luxury may not be available to all banks, especially not for many public sector banks which have just about enough capital.
But there is a solution to this “restructuring out of desperation” syndrome. Now that the RBI has done its bit, the government must capitalise the PSU banks, so they too can pick and choose candidates for restructuring with care, rather than worry breaching capital thresholds if NPAs spike.
Even if this is done, there remain two more worries: this time around, a large 55% of retail borrowers have sought moratorium, the RBI’s financial stability report shows.
As well, MSME loans have been in forbearance mode for a while now.
While large corporate NPAs as in 2015 may be rare, this mix of MSME and retail NPAs remains an unknown overhang for the banking system.
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