Restructuring loans essential for revival of Indian economy post COVID-19
With businesses under a lot of stress due to COVID-19, restructuring loans is essential for the revival of India’s economy. Reserve Bank of India Governor Shakitkanta Das said new measures to allow lenders to restructure loans would provide a durable resolution for cash-strapped businesses.
He pointed out that the central bank is trying to ensure that businesses get some regulatory help through banks on the restructuring loans that they have taken. Das said it would help the businesses to revive, jobs will be saved and in turn, will help in economic revival.
Earlier this month, the RBI had announced a recast package which focused on a case-by-case approach for restructuring rather than a blanket or sectoral approach. The top institution is also aware that banks are struggling to accelerate credit growth to revive the economy, which is set for its first annual contraction in more than four decades. As such, lenders are also dealing with a pile of bad debt that was high even before the pandemic. A similar step was taken for the 2008 economic meltdown. The RBI offered a series of restructuring schemes to the banking sector. This was hurdled by the underlying asset, which kept deteriorating for years. When the RBI initiated an asset quality review in 2015, the non-performing assets (NPAs) skyrocketed. And this triggered a prolonged phase of low growth-low investment in the economy. Keeping this in mind, the central bank has issued first-order guidelines that set out important boundary conditions for the restructuring scheme.
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However, analysts are worried that the portion of restructuring loans won’t be comfortable. An expert said anything above four to five per cent in retail restructuring should start to worry about banks. He warned that restructuring only increases the indebtedness of a retail borrower, which is not healthy. RBI’s financial stability report shows that bad loans in retail were already climbing before the pandemic. The retail bad loan ratio rose to 2.1 per cent by the end of FY20, from 1.8 per cent in end-September 2019, and it may have climbed up even further in the past three months. The expert explained that the pandemic put an abrupt halt to the consumption wheel and hurt small businesses the most. He said self-employed business people taking home, vehicle and even unsecured personal loans would be the first in line to restructure. And this would add on to the lenders’ stress.
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The RBI Governor said details of the restructuring eligibility criteria for companies would be announced by September 6 after an expert panel reviews the financial parameters and banks will be able to identify the accounts they would like to restructure internally.
