RBI May Allow a One-Time Loan Restructuring Scheme Due to COVID-19 Crisis

The Reserve Bank of India (RBI) may consider permitting a one-time loan restructuring scheme due to the severe impact of the COVID-19 pandemic on the economy.

An anonymous banking industry official said that this idea is gaining ground, considering that several stressed cases are likely to come up due to the COVID-19 economic scenario. The one-time restructuring scheme will include all COVID-19 related stressed loans that are impacted mainly during the lockdown.

This idea is likely to be discussed in the meeting of the RBI board scheduled for today, i.e., 26.06.2020. The government has already been pushing for this facility from RBI considering the likely bad loan issues in the banking system. Banking and non-banking companies have both been asking for this.

This one-time loan restructuring scheme will permit banks to give more time to borrowers to pay back the money, reduce rate of interest, and so on, depending on the nature of the case.

The idea was discussed in many meetings held between the regulator and industry representatives lately. COVID-19 lockdown that began in the last week of March has severely affected the operations of the industry and the cash flows of the companies, resulting in their inability to repay banks.

In the first week of May, Non-banking finance companies (NBFCs) asked RBI to allow a one-time restructuring of all loans in view of the economic scenario due to COVID-19 lockdown. RBI, earlier, had allowed banks and NBFCs a one-time restructuring of loans offered to micro, small & medium enterprises (MSMEs).

This scheme was recently extended till 03.12.2020, after the government’s request to the RBI. This time, RBI is expected to provide the scope of the scheme beyond MSMEs.

If RBI allows this demand, it will be a huge relief to NBFC borrowers as economic activities have slowed down on account of the prolonged lockdown.

Banks are expecting a big spurt in non-performing assets (NPAs) after the loan moratorium announced by the RBI will be over by 31.08.2020. Indian banks are already having gross NPAs of around Rs. 9.25 lakh crores.

Banks can restructure loan accounts. However, without RBI permission, they will have to set aside a substantial amount to cover such loans as provisions. It will impact the profitability of banks. In case the RBI allows a one-time facility, banks will not have to make extra provisions.

Moratorium only temporary relief

The 6-months moratorium scheme announced by the RBI, i.e., from March-May, and then June to August, is just a temporary relief for companies. It will just hide the actual stress on the books of banks for a short period.

Banks that have offered moratorium to the borrowers to all term loans across different segments, fear that some of the borrowers (especially the corporates) who have availed this facility, may not be able to make their payments after the completion of the moratorium. This may lead to a rise in bad loans.

The worst affected segment is MSME, as it does not have a significant capital buffer like large companies. MSMEs were severely hit in a slowing economy, even before coronavirus hit the economy. COVID-19 is further impacting their operations.

The Rs. 3 lakh crores MSME loan scheme, which was announced by the government, may not help this stressed sector efficiently.

MSMEs are not interested to borrow more funds from banks due to poor business situation. Unless they can generate enough revenues, it could b difficult to repay these loans.

One such example is the organised apparel retail sector, which is hit badly due to lockdown leading to a shattered economic activity. As per CRISIL (the rating agency), the revenue of the Rs. 1.7 lakh crores organised apparel retail sector is to fall by 30-35% this financial year because of temporary store closures, restricted mobility, and poor income visibility for consumers.

CRISIL said that while operating profitability is expected to be affected by around 200 basis points or bps, the absolute reduction in operating profits will be much sharper, requiring additional funding, mainly debt by firms, to make up for cash flows.