RBI's debt restructuring scheme sees few takers in corporate world: Banks

The Reserve Bank of India’s (RBI’s) loan restructuring scheme for Covid-19-affected borrowers has seen few takers in the corporate world so far, according to bank executives who have seen very little interest in it from their corporate accounts.

Under the scheme, borrowers’ accounts will not be downgraded as sub-standard or ‘non-performing’ if their loans are restructured. Rather, they will retain their ‘standard’ status.

But the fear of a negative impact on their credit rating is holding companies back. “There is not much interest among corporates to go for restructuring since the biggest fear is the impact of credit ratings on firms. We have received only four to five enquiries, which haven’t been confirmed, for accounts with exposure in the range of Rs 100-1,000 crore,” said the managing director (MD) and chief executive officer (CEO) of a large state-owned bank. 

The reluctance is striking, given that, according to a report submitted to the RBI in September by the K V Kamath Committee, Rs 15.52 trillion worth of corporate sector loans have come under stress after Covid-19.

Lenders typically look at either credit ratings given by rating agencies or the credit score of borrowers when deciding on loan applications. Banks will report the accounts of borrowers as ‘restructured’ to credit bureaux, even though the credit score will not get impacted.

Restructuring has to be reported at a borrower level to the credit bureaux and hence, all the facilities or loans of the borrower with the bank will be classified and reported as ‘restructured’, even if the borrower has taken restructuring for only one loan, says the HDFC Bank website under Frequently Asked Questions.

The credit history of borrowers who ask for loan restructuring will consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured, according to Vinod Kothari Consultants.

“Even though the credit score will not be impacted, experts said it is immaterial to some extent. When banks do large-scale funding, they don’t go by the credit score as the only parameter. They assess the credit report which will mark the account as ‘restructured’ or they will reflect the change of loan terms of borrowers. A lender may take a call based on its due diligence,” said independent consultant Parijat Garg.

Another apprehension playing on the minds of companies is that availing of the restructuring facility through lenders in India will be seen as default by international lenders — even though their account will retain its ‘standard’ status among domestic banks. 

“Big companies also have debt outside India where the US’ generally accepted accounting principles are followed. Once an account is restructured in India, a company’s assets will be downgraded as it will be viewed as default by lenders abroad. This will make it difficult for the company to borrow from abroad,” said the MD and CEO of a state-owned bank.

A top Mumbai-based bank executive said the fact remained that restructuring carried a stigma. “There are collateral consequences. The company will be thought of as having a weak profile when raising money in the international markets. Also, banks will be hesitant about enhancing working capital limits in the near future, citing restructuring as a sign for caution,” said the executive.

What’s more, banks have indicated to firms that they will increase the interest rates for restructured credit and additional facilities because the restructured credit will attract a higher risk weight.

“Banks have to set aside higher capital for a restructured portfolio, even when it may be treated as a standard category loan. Banks now assess returns on capital on a risk-adjusted basis,” said another bank executive.

The RBI has mandated lenders to provide 10 per cent extra capital for the restructuring of loans impacted by Covid-19. However, many corporate borrowers and some micro, small and medium enterprises impacted by the pandemic and eligible for loan restructuring, have indicated that they are faring better as economic activity resumes, the executive added. 

After receiving a request for restructuring from borrowers, banks have to initiate the restructuring plan by December 31. It will have to be implemented within 180 days of invocation for corporate accounts. All accounts which were in default for up to 30 days, as of March 1, will be eligible for debt restructuring. 

By March 2022, companies will have to meet five financial parameters, as prescribed by the K V Kamath Committee in its report to the RBI in September. These include total outstanding liabilities, adjusted tangible net worth, total debt/earnings before interest, depreciation, tax, and amortisation, the current ratio, the debt service coverage ratio, and the average debt service coverage ratio.