Restructuring 2.0? Banks Seek Relief Amid Covid-19 Second Wave

Bankers have pitched for another round of restructuring relief for retail and small business loans as the number of Covid-19 cases across the country rises.

In a meeting with Reserve Bank of India Governor Shaktikanta Das on Monday, bankers asked that these one-time restructuring schemes be reopened till Sept. 30, according to two bankers who attended the meeting. Bankers cited the rising infection rates, localised lockdowns and non-availability of vaccines as worrying for economic activity.

The one-time restructuring schemes had permitted debt recast without a downgrade to the non-performing category and were available to all borrowers. These schemes closed in December for large borrowers and in March for small businesses.

Retail and small business borrowers are likely to be the most affected if the economy slows once again, the bankers quoted above said. Small business borrowers had been able to withstand the effects of the Covid-19 pandemic over the last year owing to emergency funding and special bank facilities provided to them. However, another slowdown in economic activity could cause liquidity disruptions again, the bankers quoted above said.

So far, states like Maharashtra have stayed away from stopping manufacturing operations but high contract services have been impacted. The Indian economy is seen growing by 10.5% in 2021-22 but a second wave could pose a risk to the expected rebound.

While bankers pitched for restructuring relief, Das gave no assurance that such a dispensation would be re-introduced, said the bankers quoted above.

The RBI, in its statement after the meeting with bankers, said lenders have been advised to keep a close watch on the evolving situation. They have been asked to ensure adequate capital and watch any build-up in stressed assets.

Asset Quality Concerns?

Bank stocks fell sharply on Monday as concerns over asset quality reemerged. The Bank Nifty has fallen 12.4% over the past month compared to the 4.3% drop in the Nifty 50.

Early warnings of another rise in stressed loans have started to come in. This, even as complete recognition of stress from the past year is still to reflect on bank books.

“There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearances in place. We consider the micro, small and medium enterprises and retail loans to be most at risk,” Fitch Ratings said on April 9, while commenting on the prospects of the Indian banking sector amid a second Covid-19 wave.

S&P Global Ratings, on Monday, said Indian banks could face higher delinquencies on account of weakness in the balance sheets of small businesses. Unsecured retail loans could also be at risk of turning bad if the second wave continues for an extended period.

When the Covid crisis first hit, the RBI had allowed banks to first offer a six-month moratorium to borrowers and then restructure loans with a downgrade to the non-performing category. Not many large borrowers opted for restructuring under this scheme.

In the case of MSMEs, the banking regulator had extended a previous scheme, allowing restructuring for loans up to Rs 25 crore, till March 31, 2021. That scheme, too, did not see many takers, with banks reporting only 2-3% of their MSME loans under restructuring.

Still, stress remains high.

“S&P Global Ratings believes systemic risk facing banks in India is likely to remain high in the wake of the second wave of Covid-19 infections and a high proportion of weak loans. This is even though India’s economic recovery and steps by the central bank and the government to cushion the effects of the economic crisis will continue to limit stress on the balance sheets of these banks,” the rating agency said.