Home Uncategorized RBI may allow banks to recast some loans - business news

RBI may allow banks to recast some loans – business news


The Reserve Bank of India (RBI) may allow banks to restructure company loans without having to set aside funds to cover potential losses as a one-time exemption to ease the strain on businesses and lenders during the coronavirus pandemic, a senior central bank official said.

Though banks are allowed to recast loans under guidelines set out in RBI’s June 7, 2019 circular, they will be required to make higher provisions, crimping their profits. A one-time restructuring of loans was one of the suggestions made by the banking industry to help firms affected by the Covid-19 pandemic.

“The option is on the table… When and in what manner, we have to see,” the official said, adding that there were representations against allowing debt restructuring on the grounds that the ongoing loan moratorium was sufficient, and that funds might get diverted in a debt recast. Even though some businesses require more help than others, a debt recast, if allowed, has to be for all, the official cited above said on condition of anonymity, adding any debt recast has to come with “some conditions”.

An RBI spokesperson declined to comment on the issue. RBI has been opposed to debt restructuring given that banks in the past used it to classify restructured loans as standard accounts and set aside lower provisions against them. This incentivised restructuring rather than recognising bad loans. That came to an end in 2015 when the then governor Raghuram Rajan initiated an asset quality review (AQR) of banks.

During the course of AQR, RBI looked at the status of large corporate accounts across banks, which revealed significant divergence between the reported levels of impairment and actual positions. This led to banks recognising stressed accounts as non-performing assets, resulting in a surge in bad loan ratios of banks from 3.4% of gross advances in March 2013 to 4.7% in March 2015, and further to 9.9% by March 2017.

The RBI also asked banks to provide a minimum of 15% of the loan value of the restructured account to cover the risk of default, versus only 5% earlier.

In 2019, RBI again allowed banks and non-banking financial companies a one-time restructuring of loans of up to ₹25 crore to micro, small and medium enterprises (MSMEs) that were in default on 1 January 2019, without having to mark them as NPAs.

Lenders are being given an extension of 15 months (up to 31 March 2020) to classify these stressed loans are standard.

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