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India’s bank debt restructuring to delay NPL recognition

1 min read

The Reserve Bank of India’s (RBI’s) recent proposal to allow banks to restructure many types of loans will extend uncertainty over the banking sector’s asset quality, Fitch Ratings said on Tuesday.

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, small and medium enterprises (MSMEs) that were not impaired prior to March 1.

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 March 1 and the implementation of rescheduling.

It recently pointed out that a number of Indian banks — both government-owned and private — have announced capital-raising plans. But for state banks, these moves are likely to be insufficient to mitigate anticipated risks without further capital support from the government.

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.

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