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Centre not keen to fund IBA’s bad bank plan, one-time loan restructuring likely

The government’s view is that bad loan resolution should happen in a market-led way, a senior government official said. The banks demand for a one-time restructuring of loans is being considered by the banking regulator and the government.

Written by Sunny Verma , George Mathew | Mumbai, New Delhi | Published: June 23, 2020 3:01:26 am
bad bank, rbi, iba, banks dealing with non-performing assets, IBA’s bad bank plan, bad Loans The banking sector, led by the IBA, was pushing for a ‘bad bank’ to tackle the menace of non-performing assets. (Source: Bloomberg/Representational)

The government is not keen to infuse equity capital into a bad bank, which has been recently proposed by the Indian Banks’ Association. The government’s view is that bad loan resolution should happen in a market-led way, a senior government official said. The banks demand for a one-time restructuring of loans is being considered by the banking regulator and the government.

While there’s no official word from the RBI about the creation of a ‘bad bank’ or a one-time loan restructuring proposal so far, sources said a loan recast scheme for certain categories of borrowers is likely in the wake of the economic contraction, closure of thousands of units across the country and fears over a spike in bad loans from September this year. “We have studied the banks’ proposal (bad loan). The fact is there are already market-led options available for asset reconstruction and it looks better that way,” the official told The Indian Express.

The banking sector, led by the IBA, was pushing for a ‘bad bank’ to tackle the menace of non-performing assets. Sources said the proposal of a bad bank was also discussed at the recent meeting of the Financial Stability and Development Council (FSDC), but it has not found favour with the government. Finance Ministry officials did not respond to an email seeking comments for this story.

Explained

Govt in favour of market-led resolution

Banks and India Inc were also lobbying for one-time restructuring of loans and NPA reclassification norms from 90 days to 180 days as relief measures to tackle the impact of lockdown and the slowdown in the economy due to Covid pandemic. Several private banks and NBFCs have also demanded a loan restructuring scheme as moratorium alone is not sufficient to come out of the crisis situation. These demands were raised at the recent meetings of the RBI top brass with the chiefs of banks and NBFCs, sources said.

“Any decision on loan recast is likely to come only in August when the moratorium ends. There’s a likelihood of a spike in bad loans from September. The loan recast proposal is before the RBI,” said a banking source.

According to banks, the RBI needs to give operational flexibility to banks for a comprehensive restructuring of the existing loans and also a reclassification of 90-day norm. As of now, the June 7 circular on loan restructuring is stringent and gives little flexibility to banks. Rating firm Crisil said NPAs are set to rise by 150-200 basis points this fiscal. “Lockdown will impact collections and resolutions and thus result in higher NPAs. The gross NPA would be between 11-11.5 per cent for the base case and it could rise higher,” it said.

There was also demand for easing of bad loan recognition norm from 90 days to 180 days. However, banking sources said the RBI is unlikely to agree to this proposal. Currently, loans in which the borrower fails to pay principal and/or interest charges within 90 days are classified as NPAs and provisioning is made accordingly. Some banks, which are hopeful of an economic recovery, want this to be raised to 180 days to limit surge in NPAs. The central bank had never come out favourably about the creation of a ‘bad bank’ with other commercial banks as main promoters. Former RBI Governor Raghuram Rajan had opposed the idea of setting up a bad bank with a majority stake by banks.

The RBI, when Urjit Patel was the Governor, was initially reluctant to sanction forbearance to small units but relented in the wake of pressure from several board members who pushed for the bail-out of small borrowers hit by demonetisation and implementation of GST. The RBI had recently extended the restructuring deadline for MSME accounts from March 31, 2020 earlier.

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