India Ratings and Research (Ind-Ra) opines that the recently announced resolution framework (loan restructuring guidelines) for COVID-19 related stress would provide banks with an opportunity to keep viable accounts as standard in their books. This is because a large proportion of assets that otherwise would have slipped to the gross non-performing assets (GNPA) pool will now be restructured by banks. However the successful resolution of these accounts will depend as much on the revival of the economy as on the prudent filters used for identifying assets for restructuring, critical assessment and tight monitoring.

Even the provisioning required by banks under the restructuring framework is lower than what normal slippages into GNPA would have required. As per agency’s estimates, around 7.7% (INR8.4 trillion) of the total bank credit at end-March 2020 from corporate and non-corporate (retail, agri, micro, small and medium enterprises) segments could get restructured under the current framework. It could be higher if restructuring in non-corporate segments exceeds 1.9% of the total bank credit. Ind-Ra estimates that almost 60% of INR8.4 trillion was already susceptible to slip into  the NPA category post lockdown, in absence of restructuring. 

However, the restructuring announcements in the past (FY08-FY11 and FY13-FY19) had raised concerns about the efficacy of the restructuring mechanism, as most of the restructured assets had eventually slipped into NPAs. While Reserve Bank of India has put in place several guardrails this time around in the form of defined timelines and external vetting, the success of the dispensation will still largely depend upon a significant revival in the economy. 

Restructured/Slippages Pool of INR3.3 trillion-6.3 trillion from Corporates:
As per Ind-Ra’s bottom-up analysis of corporates segregated into 35 sectors and recovery curve framework along with the expectation of a sharp decline in GDP for FY21, the restructuring quantum from the corporate sector in FY21 could range between 3.0%-5.8% of the banking credit amounting to INR3.3 trillion-6.3 trillion; even stressed assets that may not slip in the near term could be restructured as COVID-19 would have aggravated stress. The agency further estimates based on an account level analysis that nearly 53% of this pool is at a high probability of restructuring/slippages. The balance 47% is at moderate risk of restructuring, and the progress on these accounts will depend upon the progress of COVID-19 situation. While a high proportion of the debt from the real estate, airlines, hotels and other consumer discretionary sectors is likely to be restructured, the largest contribution would be from infrastructure, power and construction. 

Floor for Non-corporate Restructuring at INR2.1 trillion:
With the COVID-19 pandemic impacting all sections of the society, albeit a lower impact on agriculture, the regulator has also extended the restructuring to retail loans as well. The agency has used the average of net slippage in these segments for public sector banks (PSBs) and private banks as the starting point and applied multipliers to arrive at expected net slippages for FY21, which can now be restructured. The agency expects at least INR2.1 trillion (1.9% of banking credit) of the non-corporate loans to undergo restructuring, which would have otherwise slipped into NPA.

Temporary Breather on Provisioning
: Ind-Ra estimates the provisioning requirement could reduce by around 10% on the restructured pool in FY21 from its earlier expectations on loans that could have turned NPAs. As the tenor for the restructured loans can be extended for a maximum of two years, the credit cost impact in accounting terms could be benign in FY21 and FY22. The agency has lowered its provisioning estimates for FY21 by 16%-17% to 2.3% for the banking system (2.6% for PSBs and 1.8% for private banks) from previous estimates.

Banks, especially PSBs, have also received a breather from the need to raise capital. They have definitely received more time to raise capital. This may be more useful for PSBs than private banks as the latter have either raised capital or are in advanced stages of doing the same. The agency had earlier estimated a capital requirement of INR325 billion for PSBs in FY21, at a minimum Tier I requirement of 10.0% and minimum provision requirements for expected NPAs; this may now be lower.
 

 

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Analyst Names

  • Karan Gupta

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001744

    Ruhi Pabari

    Senior Analyst
    +91 22 40001757

    Ankit Jain

    Senior Analyst
    +91 22 40356160

    Jindal Haria

    Director
    +91 22 40001750

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    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121