RBI Offers Bad Loan Relief To Banks But With Caveats

Fears that business disruptions due to the spread of Covid-19 and a 40-day lockdown across the nation could lead to a surge in bad loans, has prompted the Reserve Bank of India to provide relief to lenders.

While doing so the regulator has also ensured that banks set aside enough funds and conserve capital to deal with an inevitable increase in stressed assets due to weakening economic conditions.

The announcement came as part of the RBI’s second set of emergency announcements to deal with the economic and financial sector consequences of the spread of Covid-19.

From 90 Days To 180 Days...

At present, any account where payments are overdue for more than 90 days is classified as a non performing asset. Banks then have to provision a minimum 15 percent against these accounts. On March 27, the RBI had allowed banks to offer term loan customers a three-month moratorium. Customers who take that moratorium will not be marked down as non performing assets, the RBI had said.

RBI has now told banks that the three-month period of moratorium can be deducted while classifying NPAs. This essentially means that banks have 180 days to classify an account as an NPA for accounts that avail of the moratorium.

For example, if an account stops making repayments on March 1 after availing the moratorium and remains in default even after that, it will only get classified as a bad loan in September. Similarly, if an account stopped repayments before March 1, the NPA clock will stop for three months and restart once the moratorium ends.

Banks Benefits Most

All banks will benefit from this measure as bad loans will not spike immediately. To be sure, an eventual deterioration in asset quality may emerge in the second and third quarters of the current financial year.

The biggest benefit of this relief may flow to retail lenders, who are fearing increased defaults due to loss of income and wages across customer segments. Equally banks with large MSME and mid-sized corporate exposure may stand to benefit as those industry segments are considered most vulnerable.

Muted Benefit For NBFCs

The benefit for NBFCs may be more muted since they follow Ind-AS accounting standards which require them to provision based on ‘loss given default’ methodology.

“NBFCs, which are required to comply with Indian Accounting Standards, may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers,” the RBI said.

Banks Must Make Provisions

While allowing relief on asset classification, the RBI is trying to ensure that lenders put aside adequate provisions to cover for any eventual increase in bad loans.

“With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 percent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020,” the RBI said.

In a detailed circular later on Friday, the banking regulator clarified that for accounts which receive the moratorium, banks must make the 10 percent provisions as a general provision. Of this, at least 5 percent must be made for the March quarter and the rest by June 2020.

The RBI said that banks are allowed to adjust this general provision against statutory provisions to be made for an account once the slippages are recorded as NPA. The provisions shall not be reckoned for arriving at net NPAs till they are adjusted against the actual provisioning requirements, the RBI said in its circular. The regulator also asked banks to make appropriate disclosures regarding such provisions in the respective quarterly results announcements.

Provision Pressure Across Banks

The higher provisions will hurt all banks but those which have a lower provision coverage ratio may face more pressure.

More Time For Resolution

The RBI also extended the 210-day resolution period under the June 7 circular for stressed asset management by 90 days, as banks are finding it difficult to meet deadlines in the middle of a national lockdown.

As per the June 7 circular, banks and NBFCs would have had to make additional provisions of 20 percent if a resolution plan was not implemented within 210 days of the date of default by a large borrower.

This timeline now gets revised to 300 days.

Timeline Relaxation To Benefit Large Lenders

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services said that the decisions on NPA resolution and recognition are critical when taken together. “The resolution process had itself come to a halt so the extension of 90 more days will provide relief,” he said.

Larger lenders may benefit more from the announcement as they get relief on provisioning. However, smaller lenders who may need to free up capital from accounts under resolution will need to wait longer.

Liquidity Coverage Ratio Lowered

The RBI lowered the liquidity coverage ratio for banks to 80 percent from the earlier requirement of 100 percent, with immediate effect. The LCR would need to be increased to 100 percent by April 2021 in a staggered manner.

According to ICRA’s assessment, this move will help private sector banks which have recently seen large outflows of deposits and are dependent on inter-bank deposits to shore up their liabilities franchise.

“Relaxation in LCR requirements will enable banks to meet the regulatory LCR requirements in case their reliance on bulk deposits or inter-bank lines increases,” Srinivasan of ICRA said.

Dividends Deferred To Conserve Capital

To conserve capital, the RBI has asked scheduled commercial banks and cooperative banks to defer dividend payments against profit earned during the financial year ending March 31, 2020, until further instructions. The restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, the RBI Governor said.

This measure has been announced across a number of jurisdictions as regulators fear that banks will run short of capital as bad loans surge.

Private Bank Shareholders To Hurt

The impact of this will mostly be felt by private bank shareholders since government owned banks have not been paying large dividends for the past few years.

Keki Mistry, vice chairman of HDFC Ltd., which is the largest shareholder in HDFC Bank Ltd, said the move to exclude scheduled commercial banks from paying dividends could pose some liquidity issues for shareholders. However, he expects the situation to be reviewed on Sept. 30.

Relief For NBFCs & Real Estate Projects

Apart from the steps announced for banks, the RBI also announced a provision for liquidity for non-bank lenders.

The RBI has said that targeted long term repo operations of Rs 50,000 crore would be conducted to ensure liquidity flow to NBFCs.

MFIs/Smaller NBFCs To Benefit

The RBI said that these funds should flow to smaller non-bank lenders and microfinance institutions.

• Banks must invest at least 10 percent of the funds raised in securities or instruments issued by microfinance institutions.
• 15 percent should be invested in instruments and securities issued by NBFCs with an asset size of Rs 500 crore and below.
• 25 percent of the funds raised must be used for instruments issued by NBFCs with an asset size between Rs 500 crore and Rs 5,000 crore.

“It is good that the RBI has clarified and directed the banks to give specific amounts to different NBFCs, based on their size,” said Raman Agarwal, co-chairman at Finance Industry Development Council, an industry body. “We need to look at this from the perspective of the small borrowers who are the worst affected. The relief given by RBI is actually for their benefit more than for NBFCs,” he added.

Real Estate Relief

In addition, it extended relief on asset classification for real estate projects to include those funded by NBFCs.

In case of NBFC exposure to commercial real estate, the regulator said that the date of commencement of commercial operations can be extended by a year, without it being considered debt restructuring. This, in turn, will allow NBFCs to avoid classifying these loans as non-performing.

The facility was earlier available only to banks and has now been extended to NBFCs as well, said Mistry. “This is indeed a big move and will bring much-needed relief to cash-starved developers. It will help in easing out time for maintaining and managing cash flows for these developers,” said Anuj Puri of Anarock Property Consultants.