MUMBAI: The Reserve Bank of India's (RBI's) recent proposal to allow banks to restructure many types of loans will extend uncertainty over the banking sector's asset quality, Fitch Ratings said on Tuesday.
The policy could open a window for banks to build capital buffers while putting off full recognition of the coronavirus pandemic's impact on loan portfolios, but is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks.
The proposals extend to end-March 2021 a programme allowing rescheduling of most retail and corporate loans including micro, small and medium enterprises (MSMEs) that were not impaired prior to March 1.
Rescheduling may take a number of forms including moratoriums and extensions of loan tenors of up to two years. Rescheduled loans are permitted to be classed as 'standard assets' even if they became impaired between March 1 and the implementation of rescheduling.
Fitch said that that the scheme may be designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios.
It recently pointed out that a number of Indian banks -- both government-owned and private -- have announced capital-raising plans. But for state banks, these moves are likely to be insufficient to mitigate anticipated risks without further capital support from the government. "Our analysis suggests that most state banks will struggle to maintain a 6.125 per cent common equity tier one (CET1) ratio under a high-stress scenario," it added.
Raising capital remains challenging in the current environment. However, the new policy will reduce transparency over asset quality, which could further hinder some paths for capital raising. Private investors, for example, may be more reluctant to participate in sales of stakes in state-owned lenders until the impact of the pandemic on their balance sheets is clear.
Delaying recognition of problems in the banking sector could provide some short-term support to economic growth by stimulating credit issuance. The RBI has also raised the loan-to-value cap on credit issued against gold from 75 to 90 per cent in its efforts to boost lending.
However, many state banks may remain reluctant to lend to all but the most creditworthy borrowers in the near term as their overall weak capital position remain unsupportive of growth -- even with impaired loans permitted to be classified as 'standard' after rescheduling.
In Fitch's view, these categories will account for a substantial portion of the future asset-quality stress linked to the pandemic. There is also a risk that the restructuring policy could undermine the Insolvency and Bankruptcy Code established in 2016 by side-lining the legal process.