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Indias Bank Debt Restructuring to Delay NPL Recognition


Fitch Ratings-Mumbai/Hong Kong-11 August 2020: The Reserve Bank of India’s (RBI) recent proposal to allow banks to restructure many types of loans will extend uncertainty over the banking sector’s asset quality, says Fitch Ratings. The policy could open a window for banks to build capital buffers while putting off full recognition of the coronavirus pandemic’s impact on loan portfolios, but is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks.

The proposals extend to end-March 2021 a programme allowing rescheduling of most retail and corporate loans, including micro enterprises and SMEs (MSMEs) that were not impaired prior to 1 March 2020. Rescheduling may take a number of forms, including moratoriums and extensions of loan tenors of up to two years. Rescheduled loans are permitted to be classed as “standard assets”, even if they became impaired between 1 March and the implementation of rescheduling.

Fitch believes that the scheme may be designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios. We pointed out recently that a number of Indian banks - both state-owned and private - have announced capital-raising plans, but that for state banks these moves were likely to be insufficient to mitigate anticipated risks without further capital support from the state. Our analysis suggests that most state banks would struggle to maintain a 6.125% common equity Tier 1 (CET1) ratio under a high-stress scenario.

Raising capital remains challenging in the current environment. However, the new policy will reduce transparency over asset quality, which could further hinder some paths for capital-raising. Private investors, for example, may be more reluctant to participate in sales of stakes in state-owned lenders until the impact of the pandemic on their balance sheets is clear.

Delaying recognition of problems in the banking sector could provide some short-term support to economic growth by stimulating credit issuance. The RBI has also raised the loan-to-value cap on credit issued against gold from 75% to 90%, in its efforts to boost lending. However, many state banks may remain reluctant to lend to all but the most creditworthy borrowers in the near term, as their overall weak capital position remains unsupportive of growth - even with impaired loans permitted to be classified as “standard” after rescheduling.

India’s 2010-2016 experience with permitting broad-based debt restructuring was characterised by poor implementation and weak monitoring. The central bank has looked to address this concern by tightening supervision, for example through an Expert Committee which will vet all restructuring plans involving creditors with more than INR15 billion (USD200 million) of debt. However, this does not address the issue of oversight for most retail and MSME lending restructured under the programme. In Fitch’s view, these categories will account for a substantial portion of the future asset-quality stress linked to the pandemic. There is also a risk that the restructuring policy could undermine the insolvency and bankruptcy code, established in 2016, by side-lining the legal process that it set up.

The Issuer Default Ratings (IDRs) of Fitch’s rated Indian banks are all support-driven, based on India’s sovereign rating, so are unlikely to be directly affected by the RBI’s scheme. However, banks’ standalone Viability Ratings may face downward risk where we do not regard capital buffers as commensurate with heightened balance-sheet risks. In the past, when restructuring impaired loans and classifying them as “standard” was common, we assessed banks’ asset quality and capital on an adjusted basis, and we would be likely to adopt this approach if banks restructure a substantial portion of their loan portfolios under the new proposals.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings.

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