Banks seek more time for debt restructuring

Expecting a large amount of restructuring in the loan portfolio dealing with small and medium enterprises, banks have approached the Reserve Bank of India with a proposal to extend the period during which they can start the process.

In December 2008, RBI had allowed leeway in restructuring for viable units facing temperory cash flow problems in the face of the current economic downturn.

All accounts which carried a “standard status” on the banks’ books on September 1, 2008 are eligible to be treated as standard accounts on restructuring accounts provided the restructuring activity began on or before January 31, 2009. The package had to be put in place within 120 days from date of taking up the initiating the process.

“This exercise is a huge. Restructuring covers the small and medium size units. While the exposure per account may be small but there numbers are large. This has increased the processing work across levels for us,” said a bank chairman.

In other sectors too, bankers said, more time is required as they are yet to identify all the potentially viable companies.

Bankers had discussed this issue with RBI last week at the time of third quarter review of monetary policy .

“The restructuring is not restricted to just large accounts which are monitored regularly. The large number of small and medium size enterprises are also eligible for this,” said the head of a medium-sized public sector bank.

The effect of the downturn will be more pronounced in case of SMEs, which have lower resources to survive during this period, while larger players have more staying power. These units would need specific solutions and for that banks need to study the sector in which they operate and the impact the slowdown will have, pointed out the credit head at a large Mumbai-based large bank.

In recent months, banks are facing higher delinquency levels.

According to rating agency Moody’s estimates, the Indian banking system may show gross non-performing assets between 3-3.5 per cent by March 2009 and at higher level of 4-5 per cent by March 2010.

The extent of the asset quality deterioration will be lower in the current credit cycle compared with that seen in the last negative credit cycle (FY1999-FY2001).

It said that companies and banks follow better risk-management system, and the proportion of stressed loans is also lower. Also, it said that the loan portfolio of banks is more diversified and not dictated by project finance alone. There is also a stronger recovery mechanism backed by the SARFAESI Act.