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One time loan restructuring - lessons from last time

One time loan restructuring - lessons from last time

One time loan restructuring - lessons from last time
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By Latha Venkatesh  Aug 2, 2020 9:21:16 PM IST (Updated)

The upcoming monetary policy is going to be watched more for whether Reserve Bank allows a one-time loan restructuring and if yes what are the contours and caveats it puts in. With the moratorium on loans, granted by RBI, ending on August 31, and the governor in his latest public appearance at the CII saying he has noted the request for loan restructuring, the expectations have only gone up that some restructuring  Permission will come on August 6 along with the policy.

The upcoming monetary policy is going to be watched more for whether Reserve Bank allows a one-time loan restructuring and if yes what are the contours and caveats it puts in. With the moratorium on loans, granted by RBI, ending on August 31, and the governor in his latest public appearance at the CII saying he has noted the request for loan restructuring, the expectations have only gone up that some restructuring  Permission will come on August 6 along with the policy.

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The case for restructuring as opposed to moratorium can be easily appreciated from the lenders’ angle. NBFCs face a crippling asset-liability mismatch if a moratorium is given because most of their fund providers don’t grant them moratorium, while their borrowers take a moratorium for granted. Banks also worry about the misinterpretation of the moratorium by their borrowers as a waiver and the possible moral hazard when the discipline of repayment is broken.
The case for a loan restructuring is also straightforward from the lenders’ and borrowers’ perspective If I have no revenues for four months, I can’t possibly pay a higher interest from the fifth month, when business is just about returning.
So, lengthen the period of repayment, say borrowers. For lenders, permission from RBI to restructure loans can avert an immediate spurt in NPAs.
If it is all-round beneficial why did the just retired RBI deputy governor NS Vishwanathan tell CNBC-TV18 that if at all the RBI allows loans to be restructured, it must be very tightly targeted only at COVID-19 casualties, and with adequate provisioning. Why have the previous governor Urjit Patel and DG Viral Acharya written books largely around the theme of non-performing loans?
The reason is the very unhappy experience of the banking system with the corporate debt restructuring mechanism that was in vogue from the 2000s and was resorted to on a huge scale after the Lehman crisis, is totally untenable cases in a totally unsustainable manner. Under CDR mechanism banks often allowed projects with very limited equity and high debt to be retained as standard by granting some moratorium on interest, lengthening the repayment tenures and sometimes promising more loans, much of it with the intent of avoiding provisioning.
With the economy slowing with each passing year from 2011, the load of unrecognised NPAs only increased till governor Rajan forced recognition of nearly 2 lakh cr of bad loans in one shot with this asset quality review. For all the AQR and the bankruptcy law  and the capitalising by government,  for  RBI’ites of the last 5 years, the one thing to avoid is debt restructuring,
So how can RBI allow a legitimate restructuring without repeating the post-2009 experience? Former bankers and RBI DGs say  the following caveats will help:
  • Allow restructuring only for loans that were not overdue as of March 1st. These clearly would be healthy companies going into the pandemic.
  • Convert their interest into a term loan that can be paid over two years.
  • Maybe ask banks to provide for these loans like one would do under an INdAS regime.
  • Some former regulators say maybe an investment-grade rating requirement for the restructured loan or a nod from an overseeing committee may help, else bankers, hurt by the examples of Kingfisher and Aircel may refuse to restructure to avoid post-retirement calls from investigating agencies. Some bankers believe, that besides all these, a government-sponsored package may still be needed for airlines since the country will need them to survive post the pandemic.
    Clearly, all this must have been debated threadbare between RBI and government in the past few weeks. The coming policy is a crucial one for India Inc.
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