Loan restructuring may only provide short-term respite to lenders

The measures will lower credit cost to some extent, but analysts are sceptical of asset quality of such loans

The Reserve Bank of India’s (RBI’s) measures aimed at resolving Covid-19 stress and restructuring of MSME (micro, small and medium enterprises) advances in light of the pandemic-led economic disruptions, announced in Thursday's monetary policy, enthused those investing in bank and non-banking financial company (NBFC) stocks. The Nifty Financial Services index gained 2 per cent intra-day on Thursday.
 

There is little doubt that resolution/restructuring provides a breather at a time when bank and NBFC stocks were struggling to retain investor support amid potential escalation in credit cost (provisioning as a percentage of loan book). In fact, restructuring of personal loans was a positive surprise for the Street, which was already anticipating restructuring of MSME advances.
 

However, some analysts believe this is just a short-term respite. According to Kajal Gandhi, analyst at ICICI Securities, “While the restructuring/resolution would lower lenders’ credit cost to some extent, this would postpone lenders’ asset quality pressure.” The asset quality pressure would linger on for 2-3 years as some of the restructured loans may again slip into NPAs, she added.
 

Bunty Chawla, analyst at IDBI Capital shares a similar view. “The worry is how the restructured book behaves in medium term,” Chawla said.

 

Following the 2008 global crisis, when the RBI had allowed special restructuring, a sizeable chunk of restructured loans had turned bad, which Chawla also alluded to. This justifies the scepticism.
 

However, the degree of impact, this time, may not be the same as the nature of Covid-19-led crisis is very different from earlier disruptions. In fact, while banks have become more prudent, raised fresh capital and done some cleaning up of books in recent years, the impact could still be significant.
 

This explains why the Nifty Financial Services index ended with only 1 per cent gain on Thursday.
 

For now, brokerages are not expecting significant change to their FY21 credit cost estimates for banks and NBFCs due to the restructuring measures. However, some analysts believe FY22 and FY23 credit cost estimates could see downward revision depending upon the quantum and quality of lenders’ books that go under restructuring. While a few broader parameters have been announced, analysts are also awaiting detailed guidelines of the RBI expert committee on resolution.
 

The RBI has also increased loan-to-value (LTV) ratio for gold loans, but only for banks. Not surprisingly that stocks of Muthoot Finance and Manappuram Finance, after surging in intra-day trades, fell by 2.8 – 5.4 per cent on Thursday. For banks, while the higher LTV ratio increases scope to expand their gold loan book, the jury is out if the banks utilise the opportunity in the current context where gold prices are recording new highs.