The Reserve Bank of India has permitted banks to restructure loans of borrowers impacted by Covid-19, without tagging these accounts as non-performing. The provision this time has come with more oversight and increased disclosures.
Rajiv Anand, executive director for wholesale banking at Axis Bank, said that borrowers who took the moratorium in the first round and continued to avail the relief in the second round are the most likely candidates for restructuring. Such borrowers are fairly widespread across sectors, Anand told BloombergQuint.
Anand also said increased checks, disclosures and already elevated provisioning may prevent a return to the past when lenders used restructuring to hide stressed loans. “I think in general it is fair to say that the era of restructuring without taking the hit is over.”
The RBI’s external committee to look through restructuring deals would probably focus on creating a sectoral framework. It would then be better to let bankers decide on individual cases, since individual approvals may delay the process.
Anand also said interest rates may be close to bottoming out in India. “If I were a corporate treasurer at this point in time, I should certainly realise the fact that India is a 4.5% inflation economy and policy rates are about 100 to 125 basis points below that. These can’t sustain into the long term. Therefore, it is inevitable that these rates are going up sooner than later.”
Watch the conversation here and read edited excerpts below:
Edited transcript of the conversation below:
This time’s RBI policy was more about providing the flow of money, through various means. What did you make of it.
I think the pause was really on expected lines. Liquidity in the system continues to be ample, RBI continues to buy dollars; imports still continue to be weak. Therefore it is fair to say that dollar purchases will continue as we go forward, i.e. ample liquidity will remain in the system.
I think we were also coming to the end of two phases of moratorium and one of the things that banks in general were saying was the fact that we don’t need a moratorium anymore. However, given the fact that RBI’s outlook itself is that NPAs would rise to somewhere between 12-14%, depending upon the severity of the shock, some sort of restructuring was certainly required.
I think the sort of restructuring that we have now put on the table is quite pragmatic – you’ve got to be standard as at March 1 and you can’t be more than 30 days past due. This all sounds very familiar because this is really the starting point of what we saw on moratorium one. And, therefore, in a sense what we’re saying is that customers who were standard on March 1 were running a pretty good business; got impacted as a result of Covid and took the moratorium and stayed in moratorium in the second round have to be tackled as we go forward.
Now, the RBI has given us an instrument to deal with customers who have not paid through the moratorium. We now have the ability to restructure some of these entities as we go forward. So I think the dispensation that we’ve got from the June 7 circular, and this is relevant more for the corporate side, the fact that we don’t have to see a change in management for us to restructure, we can continue to show it as standard, I think is all positive.
The fact that we will need to maintain a 10% provision coverage for accounts which have gone into restructuring, I think is also pragmatic and will ensure that banks are taking the more pragmatic step in terms of restructuring as we go forward.
A couple of specific questions. The first one being the condition that should not have been more than 30 days overdue on March 1; do you think that’s adequate to sift out people who may have been in non-Covid stress or is that the first level of check? And then the KV Kamath committee and the bank board resolutions will add to the level of checks?
So I think it’s the first level of checks.
I think in general it is fair to say that the era of restructuring without taking the hit is over. It is not as if we can’t restructure even today. We can restructure accounts but what we need to do is to take it into NPA if that actually happens. Therefore, what RBI is saying now is if you want that dispensation it is applicable only to customers who have been impacted by Covid. So, we are not in any manner changing the credit discipline within the environment. We do recognise the fact that there has been an impact because of Covid and, therefore, the restructuring mechanism is coming into play.
Therefore, for everybody else the standard of marking NPA at the end of the 90-days if an account is delinquent, that continues. I think that’s really the way to do this if you want banks to be pragmatic and if you want to ensure that the long term sustainability of the financial system is indeed maintained.
Hypothetically, if you were assessing an application for a restructuring in this context you would be looking at what?
I think the first cut-off is that you’ve got to be standard as of March 1.
Every bank has done a fair amount of risk assessment of its portfolios. We’ve arrived at which are the sectors that are going to take much longer and have seen a deeper impact in terms of impact and which are the sectors that are going to get out of this Covid crisis. Ultimately, for a company to approach a bank and to expect that banks will restructure, I don’t think it’s a given. So therefore banks will also have to assess whether there is any viability in that business as we go forward.
Some of the industries as we speak hotels and cinema entities etc.,have actually raised capital and they’ve cut costs quite dramatically. The call is that, yes, in the next six months or maybe one year, we will start to go back to movies, etc. and so maybe there is viability in some of these businesses but some of these businesses may not survive. Therefore, they may not get restructuring.
Also remember that it is not the call of one banker. All the bankers to that organisation will need to get together through the inter-creditor agreement, the percentages of approval needed will be very similar to the June 7 circular and then we get this going as we go forward.
This brings me to the timelines. One, we have a committee which needs to come up with sectoral rules and seemingly vets every proposal. We also have the ICA structure, which hasn’t actually worked very smoothly or quickly. Do you think enough has been built into the circular to ensure that it happens in a timely fashion because the window available isn’t very long.
I think the inter-creditor agreement part is fairly clear. We have seen a number of cases going through that pipeline. Either they’ve gone to the logical conclusion or because of the delays, banks have provided for it. So, that pipeline is fairly clear. How this committee headed by Mr. Kamath is going to work is still not clear and I think we will have to get a better understanding of that as we go forward.
If every proposal has to be vetted though, would that be a bit of a traffic jam?
Of course, I don’t think that makes any sense.
I think at this point in time the consortium of bankers get together; the lead bank is in a sense bearing the burden and I think it’s fairly well established. To now say to the bankers that you will not decide whether this is applicable and that will get outsourced to another committee. I don’t think that will work. I don’t think that is the intent either.
I would expect the committee to create a framework on a sectoral basis that debt- equity for this particular sector can go to four-times or three-times or five-times or whatever that number is and put a framework around it on a sectoral basis. Then let the banks work around that framework which probably would be a much better approach.
The fact that there is a disclosure format that’s been provided is good. That will prevent banks from hiding bad loans? The street will anyway look atNPA plus restructured loans and assess your asset quality accordingly.
Absolutely. I think what is important to understand also is that this is a very different type of restructuring. I think most bankers are coming into this much better provided. The provision coverage ratios are much higher and there has been a fair amount of provisioning that has already been done for the impact of Covid in the last quarter of last year and to some degree in the first quarter of this year as well.
So, the starting point as far as this restructuring is concerned is very different from what we saw in the previous cycle. The whole alphabet soup of S4A etc., that is no longer required. Here it’s a much more straightforward cash-flow based sort of restructuring that is happening. Like I said the starting point really is all customers who were in moratorium one and who were finally left when the moratorium closes. To my mind that is the universe of customers who to start with are eligible for the restructuring process.
I’m not asking for numbers at all but if one had to assess the pool of loans that could come into something like this; you’re saying we should look at the moratorium one numbers perhaps as a starting point?
A lot of banks have also disclosed the fact that out of the moratorium one customers there has been a collection process that has gone through and various banks have disclosed various numbers. Then, of the balance, either they will slip into NPA or they continue in moratorium two and they still haven’t paid. They become eligible candidates for restructuring.
To me, this pipeline is the rule.
There could be some exceptions outside this which are usually one-offs but those are really the exceptions. To me the rule is that a customer needs to come through this moratorium pipeline to be eligible for restructuring, I would be very surprised if the universe of customers who have not taken moratorium one or moratorium two are actually now coming to the banks for restructuring.
A sense of what’s happening on the ground. We’ve all spoken of the obvious industries where restructuring may be required. Do you think the pool would be largely coming from those kinds of sectors such as airlines, hotels, etc., or is it a far wider set that you think may need or may come for restructuring?
It will be reasonably wide but remember the RBI for the first time has also permitted restructuring on the retail side and restructuring on that side really means that extension of tenors by up to two years. Therefore we could see some of the retail loans as well getting restructured i.e. tenors being increased as well.
Do you think that personal loan restructuring is a useful provision at this point in time and what does it entail? Will it probably mean that these borrowers will take a hit on their credit history and could see potentially higher rates in the future?
We’ll have to figure that out, but I think it’s fair to say that whether it is small-businesses, self-employed or within the formal sector, there has been a significant impact to cash flows. People have lost their jobs, people have taken pay cuts and haven’t gotten increments etc. But many of these people will hopefully start to see normalisation of their incomes in the next six months, maybe 12 months.
Therefore for customers like that, I think a restructuring opportunity of this nature is useful. What it does to their credit assessment etc., we will need to see.
But I must put the caveat out here that especially for retail customers, and to a large degree corporate as well, what we’ve seen through the moratorium and through historical restructuring as well, there is a certain stigma attached to the fact that you have restructured loans or you have chosen to take moratoriums. So, unless you think that it is absolutely essential, I would not recommend it.
The RBI has tightened rules for current accounts. What are they trying to check through these tightened guidelines for current accounts?
So, basically, what the RBI has been concerned about is the diversion of funds. So, if the money is coming from a loan account and it is moving to another current account in another bank and being utilised not for the reasons for which the loan has been given, it is important for bankers to know where those current accounts are.
Therefore the norm that RBI has put in place is that if I’m going to open a current account I need the NOC from the lending bank so that the lending bank knows that there is another current account being opened for its loan customer. So it’s really being able to bring credit discipline and ensure that this whole issue around diversion of funds, etc., is much better managed than what it is today.
What do you make of the interest rate environment right now? Are we close to the lowest on rates?
If I were a corporate treasurer at this point in time, I should certainly realise the fact that India is a 4½ % inflation economy and policy rates are about 100 to 125 basis points below that. These can’t sustain into the long term. Therefore, it is inevitable that these rates are going up sooner than later.
We could argue on whether rates are going up in 6 months or in 12 months but the rates are certainly going up. So, therefore, if I was a corporate treasurer, if I don’t think rates can fall more than maybe 25 basis points lower at this point in time, I would actually look to elongate my liabilities at this point in time because of the fact that policy rates are so low. Thanks to the transmissions which have been very aggressively pushed by the RBI, credit spreads especially for AAA and to some degree AA bonds have come down from in excess of 200 basis points to about 50 basis points. If you go back into history, this is really the lower end from a credit spread perspective as well.
Two, I don’t think that the fiscal is going to get any better anytime soon. If you look at it as a percentage of GDP as well, we need to see growth going up quite sharply not just for next year but over the next three to five years for debt to GDP to come down. Therefore, whether you worry about the debt to GDP number which is going to be I don’t know close to 90% from next year or the fact that they’re going to see growth back in the next 12 to 18 months, I think rates are going to go up. So, if you’re prudent and not too greedy, this is a great time to extend liabilities.
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