Covid-19: Lenders seek deferment in loan repayment, reclassification of NPA

IBA's managing committee met on Friday and decided to put up five set of demands to the central government and RBI to help the financial sector and retail and corporate borrowers alike

Lenders are set to demand a host of relaxations on repayment of loans in a bid to tide over the COVID-19 crisis. These include a 90-day relief in classifying accounts as non-performing assets (NPAs) and deferring installment of term loans.

The management committee of the Indian Banks’ Association (IBA) met on Friday and froze a set of demands that it will put up before the Reserve Bank (RBI) and the government. It will make a bid to help the sector and retail and corporate borrowers alike, IBA chief executive officer (CEO) Sunil Mehta told Business Standard over phone.

“We are asking for a 90-day extension of the timeline for slippage of a running account – both cash credit and overdraft – into NPA,” Mehta said. If borrowers are unable to repay loans within 90 days of the due date, their loan account is classified as NPA by the banks right now. If the IBA’s recommendations are accepted, the NPA tag will take six months.

During the intervening period, the accounts will not be classified as a ‘stressed asset’, technically known as Special Mention Accounts (SMA)-1 or SMA-2 accounts. SMA-1s are those in which loan repayments have been overdue for a period between 31 and 60 days, while SMA 2 accounts are the ones with a delay of 61-90 days.

Bankers foresee that the COVID-19 impact on the sector will last for six months. This is because businesses across all sectors will run dry on cash and even take extreme measures such as retrenchment to tide over. Banks want easier loan repayment terms, a chief executive of a bank, who was present in the meeting, said.

“We have decided to demand deferment of up to six months in term-loan installments with a consequential shift in the repayment period by six months. This will be left to the discretion of bankers. If lenders feel that half of the installment amount can be deferred, as the payment capacity of the borrower has weakened, additional six months can be given. Even full installment sums can be postponed on a case-to-case basis,” said Mehta, who was earlier the managing director (MD) and CEO of Punjab National Bank.

The coronavirus pandemic has affected several industries in India and the impact is visible across all segments as cities head for a lockdown to contain the spread. The sectors that have seen an immediate impact range from travel and tourism to hospitality and retail. India’s import-dependent sectors, such as automobiles and pharmaceuticals, will also take a hit.

The IBA will seek an extension of window for resolving stressed assets from the RBI.  According to the RBI’s June circular, banks have to review the stressed accounts within 30 days of default, followed by 180 days for implementing a resolution plan, failing which they have to account for possible losses in their balance sheet.  “We will seek an additional six months window, especially in those cases where resolution is possible and got impacted due to the pandemic,” Mehta said. To keep more cash in hand, banks will ask for a flat 1 percentage point reduction in the cash reserve ratio (CRR) from 4 per cent now. 

“Corporates are under tremendous liquidity pressure. Mutual funds are under stress as investors are exiting. Firms are desperate to raise money and that can be seen from the price of bonds. Promoters have pledged shares that are under stress. The stress is spread across all sectors and there will be a disruption for six months at least,” the banker, cited above, said.

Recommendations

* Extension of 90 days in classifying loans as NPA:  An account to be classified as NPA after 180 days of default; no classification of stressed assets during this period

* Forbearance of 6 months in interest of term loan and working capital loans: Term loans and working capital loans installments to be deferred by 6 months

* Longer resolution period:  Additional 180 days for resolution of stressed accounts before bankruptcy proceedings. RBI allows 210 days in total for resolution of stressed assets

* Additional cash in hand:  Reduction in cash reserve ratio by 1 percentage point to 3% and deferment of additional money towards capital conservation buffer by 1 year

* Longer window for compliance: Extra time window for regulatory compliance. For instance, reporting of fraud