India's central bank to allow banks restructure stressed loans to small firms

As much as $18.7 billion of loans made to small firms are stressed, according to data
India's central bank to allow banks restructure stressed loans to small firms
The latest directive is new central bank Governor Shaktikanta Das’s first big policy move and yields to the government’s call to provide relief to small firms, many of which are still suffering from Prime Minister Narendra Modi’s 2016 cash-ban programme.
By Bloomberg
Wed 02 Jan 2019 10:43 AM

India’s central bank will permit lenders to restructure stressed loans to small companies, breaking from a five-year-old policy of eschewing sweeping corporate debt overhauls.

The Reserve Bank of India will allow one-time restructuring of loans to micro, small and medium-sized companies that are in default, the regulator said in a statement on Tuesday. To be eligible for the programme, the loan should not exceed 250 million rupees ($3.6 million), according to the statement.

The latest directive is new central bank Governor Shaktikanta Das’s first big policy move and yields to the government’s call to provide relief to small firms, many of which are still suffering from Prime Minister Narendra Modi’s 2016 cash-ban programme. As much as 1.3 trillion rupees ($18.7 billion) of loans made to small firms are stressed, according to data from SBICAP Securities Ltd.

“The biggest concern with such forbearance packages is the risk that such schemes could end up vitiating the repayment culture of honest MSME borrowers by encouraging defaults,” ASV Krishnan, vice president at SBICAP Securities, said in a note on Wednesday.

Still, the RBI’s precondition for borrowers will “disincentivize any incremental non-repayment or defaults by existing standard borrowers,” he said.

In Tuesday’s notice, the Reserve Bank asked lenders to set aside an additional 5 percent for the debt that will be revamped under the programme. Banks will have to make an extra provision of 50 billion rupees, said Anil Gupta, vice president, at ICRA Ltd., the Indian unit of Moody’s Investors Service.

Previous governors including Raghuram Rajan and Urjit Patel have shunned loan revamp programmes.

The move was praised by Swaminathan Gurumurthy, a chartered accountant and a key advocate of easier rules for small companies on the central bank’s board. Gurumurthy, who is associated with the economic wing of Rashtriya Swayamsevak Sangh - the ideological parent of Modi’s Bharatiya Janata Party - is a champion of the small traders who are BJP’s key voting bloc.

State-run banks under the Reserve Bank’s Prompt Corrective Action framework sanction will benefit from the move, according to Kotak Institutional Equities. Still, the brokerage said the timing of the move came as a surprise.

The bad-loan ratio in India’s banking industry fell in September for the first time since 2015, with the central bank predicting it may drop further. The industry’s gross bad-loan ratio is expected to fall to 10.3 percent by March from 10.8 percent in September, the Reserve Bank said in its Financial Stability Report on Monday.

"Lenders usually step back lending when the early warning indicators suggest rising trends of deterioration,” Kotak said in a report to clients on Wednesday. “However, the last available data suggests that lenders have been quite comfortable and growing this portfolio at a healthy pace.”

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