Banks and non-bank lenders could restructure up to Rs 10,000 crore in loans to micro, small and medium enterprises without classifying them as bad debt, according to an estimate by rating agency ICRA. This, after the Reserve Bank of India gave in to demands for easier loan restructuring terms for small business.
The ‘one-time’ restructuring scheme announced on Tuesday allows for loan terms — such as interest rates and tenures — to be revised without a change in asset classification from standard to non-performing. Known as regulatory forbearance in industry parlance, such restructuring was widely misused for evergreening of bad corporate loans in the 2011-13 period.
The benefits were withdrawn for large corporate loans in 2015 but have now been brought back for MSME loans up to Rs 25 crore. Loans which were in default as of January 2019, but are not yet tagged as non performing assets, will be eligible for restructuring under the new scheme.
According to data collated by Small Industries and Development Bank of India (SIDBI) and TransUnion Cibil, total loans to non-individual MSME borrowers under the Rs 25 crore mark stood at around Rs 13 lakh crore, in September 2018. Of this, banks contributed around Rs 10 lakh crore, while NBFCs added the rest.
ICRA assesses that loans worth about Rs 10,000 crore within this category are stressed, said Anil Gupta, head of financial sector ratings at the agency. The assessment has been based on the borrowers who availed of a relaxation provided last year. That relaxation allowed banks to classify small business loans as NPAs 180-days after default rather than the norm of 90 days. The dispensation was set to end by the middle of 2019.
If you take the total data of loans which used that relaxation, it was about Rs 10,000 crore as of September 2018. But now with the forbearance, these borrowers could be tempted to restructure to get relief till March 2020.Anil Gupta, Head - Financial Sector Ratings, ICRA
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Relief For Larger MSMEs
Larger MSMEs may benefit most from the restructuring provision as stress in the Rs 10-25 crore loan category has been the highest.
Data from MSME Pulse report released by TransUnion-CIBIL and SIDBI, shows that this segment had NPA ratios in excess of 14 percent as of June 2018. The overall NPA ratio for micro and SME borrowers stood at 8.7 percent and 11.5 percent respectively.
A senior public sector banker, speaking on conditions of anonymity, said that while the immediate impact of the restructuring norm might not be big, the broader message by the RBI could be positive for the MSME segment. Smaller borrowers have been finding it difficult to access formal financing since the liquidity crisis hit the NBFC sector in October. With a restructuring tool at their disposal, lenders might be able to regain confidence in lending to MSME borrowers, the banker quoted above said.
“We have noticed in the past that restructuring could be a tool to provide temporary relief to borrowers, which may even help them to come out of stressed situations,” said VG Kannan, chief executive officer, Indian Banks’ Association.
Words Vs. Actions
The relaxation may provide relief to stressed borrowers and banks but is questionable from a regulatory standpoint.
Ironically, just a day before the RBI announced the one-time restructuring scheme, the regulator had cautioned about risks that may emerge from the spurt in lending to MSME borrowers. The risk, according to the regulator, is pronounced in the case of public sector banks.
“An analysis of portfolio of Micro, Small and Medium Enterprises (MSMEs) shows that the performance of PSBs in the MSME segment trails that of other intermediaries viz., private sector banks and NBFCs. This is both in terms of inherent as well as realised credit risk underscoring the need to improve credit appraisal skills,” said the RBI’s Financial Stability Report.
The report further noted that 20 percent of the exposure of public sector banks is to the lowest rated MSMEs, where default risk is high. Moreover, public sector banks under the prompt corrective action (PCA) framework have seen strong loan growth to small borrowers, leading to concerns of a lowering of risk standards.
Despite raising these concerns at an analytical level, the RBI has eased rather than tighten its norms for the MSME segment.
Though the immediate impact of the recent announcement is limited, calls could rise for further forbearance in case of larger accounts. The regulatory stance on more such demands is now unclear in this backdrop and remains to be seen. Loan waivers or forbearances are detrimental to credit culture and do not bode well for the banking sector which is already grappling with past lending issues.Saswata Guha, Director, Fitch Ratings
The Experience With Forbearance
The relaxation followed a stand-off between the RBI and the government on a number of issues, including that of MSME loans. Some RBI board members, including S. Gurumurthy, had demanded easier loan restructuring for small borrowers. At its meet on Nov.19, the last chaired by former governor Urjit Patel, the board ‘advised’ the the RBI to consider a scheme for the restructuring of small accounts of upto Rs 25 crore. Patel resigned on Dec.10 and the final decision on the matter has been signed-off on by the new governor Shaktikanta Das.
But the RBI’s experience with forbearance has not been encouraging.
Until April 2015, banks were allowed to restructure loans without marking them down as NPAs. The provisions attached to these loans was also set at a lower 5 percent compared to a 15 percent provision required against NPAs in the first year. It is widely believed that banks used this rule to evergreen stressed assets, which eventually led to the NPA crisis being faced by the Indian banking sector.
Of the 656 cases worth Rs 4.74 lakh crore which were referred to the CDR cell for restructuring, only 111 cases with loans worth Rs 84,711 crore exited successfully, Mint newspaper reported in July 2018. 298 cases with loans worth Rs 1.85 lakh crore were either withdrawn or had exited due to failure of implementing a restructuring package.
During last few years, RBI has been doing away with various schemes for asset quality forbearance and hence this is regressive from a credit culture point of view given the past experience of the banking sector with restructuring. However, given the challenges faced by the MSME segment in availing funding from the organized markets in the current environment, the measure attempts to improve their liquidity position.Karthik Srinivasan, Group Head, ICRA
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