Icra expects loan restructuring at 5-8% of overall banks loan book under new norms

SMA 0 accounts are those where interest and principal payment is overdue for 1-30 days. “With relatively tighter loan restructuring norms, such as eligibility of only SMA-0 borrowers as on March 1, 2020, independent credit assessment (ICA) of the resolution plans (RP) and a higher upfront provisioning requirements, we expect the loan restructuring of around 5-8 per cent of the overall loans,” rating agency Icra Ratings said in a report.

With tighter debt recast norms announced by the Reserve Bank, the likely restructuring by banks will be around 5-8 per cent of their overall loan book, says a report. Last week, the RBI allowed banks to go for one-time restructuring of corporate and personal loans that are under stress due the COVID-19 pandemic. The central bank also laid out some norms for implementation of a resolution plan which included eligibility of only special mention accounts 0 (SMA-0) borrowers as on March 1, 2020, independent credit assessment (ICA), higher provision among others. SMA 0 accounts are those where interest and principal payment is overdue for 1-30 days.

“With relatively tighter loan restructuring norms, such as eligibility of only SMA-0 borrowers as on March 1, 2020, independent credit assessment (ICA) of the resolution plans (RP) and a higher upfront provisioning requirements, we expect the loan restructuring of around 5-8 per cent of the overall loans,” rating agency Icra Ratings said in a report. A committee has also been set up under the chairmanship of K V Kamath which will recommend a list of financial parameters which, in their opinion would be required to be factored into the assumptions that go into each resolution plan, and the sector specific benchmark ranges for such parameters.

The agency expects the proportion of loans under moratorium to decline to 10-15 per cent of the overall system wide loans by the end of the second quarter of FY2021 from around 10-60 per cent levels across various lenders during moratorium phase II. “Of the estimated 10-15 per cent loans under moratorium, we estimate the slippages for FY21 at 3-4 per cent of the overall loans of banks (largely the SMA1 and SMA 2 pool as on March 31, 2020), 5-8 per cent could be restructured and the rest 2-3 per cent is likely to result in an increase in overdue categories loans,” the agency's vice president (financial sector ratings) Anil Gupta said. The system wide SMA 1 (where repayment are overdue for 31-60 days) and SMA 2 (61-90 days overdue) stood at around 6 per cent of the loan of the banks as on March 31, 2020. The agency expects a large portion of these loans will be part of the moratorium loan book and will be most vulnerable to slippage in FY2021, as the resolution plan under August 6, 2020 circular cannot be implemented to these loans.

Icra had earlier projected a slippage of 5-5.5 per cent for the banks during the current fiscal, driving an increase in gross NPAs to 11.3-11.6 per cent by March 31, 2021. “With expectation of reduced slippage of 3-4 per cent, we expect the GNPAs to increase to 9.8-10.3 per cent by March 31, 2021 from 8.5 per cent as on March 31, 2020, the report said. The agency had earlier estimated capital requirements for public sector banks (PSBs) at Rs 46,000-82,600 crore for FY2021 and Rs 25,000-48,300 crore for private banks (PVBs) during FY2021-22, which will now decrease due to lower slippages. “Our broad estimates show that the capital requirements for PSBs could decline to Rs 20,000-55,500 crore for FY2021 and Rs 22,000-33,400 crore for PVBs during FY2021-22,” it said.

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