The Big Story

The Reserve Bank of India in the MPC meeting has decided to permit a one-time restructuring of corporate loans to avert a surge in bad debts as the economy reels from the impact of the coronavirus pandemic.

Now the Non-performing assets have posed a monster problem for banks in India. The RBI had warned that bad debts could rise to as much as 14.7 per cent up from 8.5 per cent, as pandemic continues to spread.

Let’s take a step back and understand an NPA

NPA are those loans given by banks or financial institutions which borrowers default in making payment of principal amount or interest for more than 90 days.

And on March 27th, the Reserve Bank of India suspended all loan repayments due in March, April, and May 2020. And then, the Reserve Bank did it once again and extended the moratorium by another 3 months, until August 2020.

The extension on the moratorium on repayment of loans means that borrowers will not have to pay their loan EMI and same will not be declared as NPA by the Banks

When a bank defers EMIs for six months, two issues are likely to crop up.

One, it will hide the actual stress on the cash flows of the borrower. In the pandemic scenario, without the moratorium cover, there would have been defaults. This has stayed hidden so far.

Second, it can spoil the loan payment behavior of a section of borrowers. This is especially true for smaller borrowers who look for political freebies. Some of them wouldn’t want to resume payments even after the scheme is over.

The report states 55% of all customers from scheduled commercial banks (like HDFC and SBI) opted to defer their loan repayments—about 50% of all outstanding loans. That’s quite a big sum.

Thus, in the absence of a one-time recast, banks would have been forced to deal with a big surge in bad loans in the post-moratorium period. This worry was addressed by the recast scheme.

But the bigger point is what’s next for government banks after the restructuring?

There is an obvious additional capital requirement awaiting banks.

Under the RBI’s initial guidelines, they need to set aside an additional provision of 10 per cent for the post resolution debt. This isn’t a small amount.

There brews a bigger issue of capital for state-run banks who control 60 per cent of the industry assets

Former RBI deputy governor Viral Acharya in an interview with Money control said the ultimate solution to the asset-quality problem of public sector banks (PSBs) comes down to “capital, capital and capital”


The government is not in a position to infuse fresh capital in PSBs. The pandemic has impacted the fiscal position as tax collections have dwindled.

Much of the capital infused in the PSBs in the last few years (more than Rs 3 lakh crore) has gone into repairing the cracked balance sheets of banks.

What is the solution? Privatisation ? Is the opportunity to look at privatisation of at least some of the PSBs ?

Until then ….

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