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India's targeted relief plan may help banks avoid sharp rise in bad debt

The Indian central bank's targeted relief plan for borrowers whose businesses have been thrown off-gear by the coronavirus pandemic will likely help lenders avoid booking a sizable chunk of troubled loans as bad debts, analysts say.

The Reserve Bank of India on Sept. 7 unveiled financial parameters such as liquidity and debt-service ratios that lenders need to consider while assessing requests under its framework for the resolution of loan accounts that became stressed due to the pandemic.

The central bank has been explicit with the parameters, though it has left room for banks to make their own risk assessment, said Radhika Rao, an economist at Singapore's DBS Bank. "There has been an effort to ensure that the required support is extended to those most affected by the pandemic and not ones that might be over-leveraged [or having] over-stretched balance sheets," Rao said in comments emailed to S&P Global Market Intelligence.

The RBI's measures will give additional time and liquidity to companies, said Siddharth Purohit, a research analyst at SMC Global Securities. "This will certainly help the genuine borrowers get relief in the medium term ... These measures, in addition to supporting the corporates, will also help revive the economy to some extent," he said.

An already slowing Indian economy was hit hard by a nationwide lockdown announced in March, causing a 23.9% slump in the nation's GDP in the June quarter, marking the worst contraction by a major economy during the pandemic. Banks are expected to bear the brunt of the distress among businesses, with the RBI predicting nonperforming loans to surge to as high as 14.7% by March 2021 under its "very severely stressed" scenario, from 8.5% in March this year.

Better than bad loans

"The restructuring will also lead to some additional credit cost for the banking industry, but this is certainly better than straight away classifying accounts as NPAs," Purohit said. Overall, it may not lead to incremental lending, but the additional funds given by banks may help revive some companies, he added.

The central bank last month appointed a committee, led by veteran banker K.V. Kamath, to suggest parameters for resolution of assets that became stressed due to the pandemic. In its report submitted Sept. 4, the panel identified 26 industries, including automobile manufacturing, aviation and hospitality, among sectors that have been most affected by the pandemic.

"Time is of the essence as the present juncture. Considering the large volume [of loans] and the fact that only standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround," the committee said in its report. The committee found that nearly 70% of the corporate debt that it examined was affected by the pandemic, of which 30%, or about 15.520 trillion rupees, of debt was hurt purely because of the pandemic.

Selective relief

Nomura analysts estimate that between 30% and 50% of the companies across the different sectors do not meet the necessary criteria on historical data. The multitude of parameters are aimed at ensuring that the "restructuring may be more prudent and be restrictive to COVID-19-impacted and viable cases only, while subjectivity involved around cashflow projections does increase some scope of misuse as well," Nomura said in a Sept. 8 note for clients.

Rao of DBS also said there is some concern about sectors that had been under pressure even before the pandemic. The disease outbreak might have further deteriorated their performance ratios and they may "require deeper scrutiny by lenders," she said.

However, Ramesh Nair, the CEO of the Indian unit of property consulting firm Jones Lang LaSalle, said the new framework will enable companies to focus on "restarting their business in the next normal with renewed vigor and vitality."

"Lower interest rates combined with this accommodative stance of the central bank will aid in rebuilding consumer sentiment, [and] thus consumption, including housing sales," Nair said in an emailed statement. Construction and real estate are also among the 26 sectors named in the RBI report.

As of Sept. 7, US$1 was equivalent to 73.47 Indian rupees.