Covid-19 impact: Banks want NPA forbearance for next two quarters or more

An account becomes NPA if default is beyond 90 days. With the present crisis, a huge number of accounts will fall in this category in the next two quarters

While the government has raised the threshold for invoking insolvency under the IBC (Insolvency & Bankruptcy Code) to Rs 1 crore from  Rs 1 lakh, financial institutions and banks expect much more, with banks in particular want at least 90 days deferment in NPA (non-performing asset) classification. The real impact of the crisis could be felt in the next two quarters, they said.

A senior official of State Bank of India said, “The real economy is in deep trouble. In the next two quarters or more, banks expect deferment of NPA. Additionally, sectors like aviation, airport infrastructure, logistics, transport and hospitality among other would need some stimulus.”

An account is classified NPA if the default is beyond 90 days. With the present crisis, a very large number of accounts will fall in this category in the next two quarters.

According to a senior banker of a public sector bank, there is need for blanket forbearance on accounts which will turn NPA in the next three months. “Otherwise a huge number of accounts will turn NPA,” said the banker.

“So far the government has spelled out relaxation on compliance-related issues. We expect the government will soon come out with bigger relief for the banking sector,” said head of another public sector bank.

While banks are seeking relaxations, a number of non-banking finance companies are looking up to banks for moratorium. For example, in case of NBFC-MFIs, as the operations will remain suspended, and MFIs would not be able collect dues from borrowers. According to Manoj Nambiar, chairma n, MFIN (Microfinance Institutions Network), if MFIs are to provide any relaxation to their borrowers, they expect similar treatment from banks.

"The government  been taking a number of steps to ring-fence the economy from the pandemic. The finance minister's decision is a welcome move and will protect MSMEs from liquidation to a large extent. However, SMEs and MSMEs depend on large institutions for their survival and growth. Hence, the government must also extend necessary support to large corporations as well since they employ a large number of people and MSMEs are dependent on them. Without adequate support from the government India will be staring at an economic catastrophe," said Sunil Kanoria, Vice Chairman, Srei.

It may be noted, the present quarter while coronavirus might lead to much restructuring in the present and next quarter, higher provisioning needs on account of failed resolutions of accounts under ICA (inter creditor agreement) will further add to bankers’ woes.

“Through the uncertain period, we can expect several new NPAs in the near future. With the increase in threshold and possible suspension of Section 7 of IBC, the banking sector may have to look at other avenues outside of the IBC to claim for the defaults. Secured lenders could possibly explore Sarfaesi. The banks with also have to look for some financial aid from the government,” said Saurav Kumar, Partner, IndusLaw.