When will SC status quo on bank loans end?

If it continues, wary of borrowers' opportunism and distorted credit discipline, banks may not come forward to lend even if we shout ourselves hoarse over their risk averseness

Indian banks’ pile of bad assets had been on a decline. Their gross non-performing assets (GNPAs) dropped to 7.5 per cent of their advances in September 2020 and after setting money aside, net NPAs dropped to 2.1 per cent. The last stress test conducted by the Reserve Bank of India (RBI) projected the industry’s GNPA ratio increasing from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario. But if the macroeconomic environment worsens and the stress deepens, it may rise up to 14.8 per cent.

The public sector banks are the most vulnerable in the lot. Their 9.7 per cent GNPA in September 2020 may increase to 16.2 per cent by September 2021 under the baseline scenario. In the worst case, it could rise up to 17.6 per cent. The comparable figures for the private banks are 8.8 per cent and foreign banks 6.5 per cent. These projections were made in the RBI’s January Financial Stability Report, a biannual health check of the banking system.

The bankers seem to have a different narrative. All of them are putting up a brave front, exuding confidence about the quality of their loan assets. They say borrowers are paying back their loans and the collection efficiency for most banks is going up and up. What’s more, the queue seeking restructuring of loans is much shorter than what the bankers had expected.

Has the regulator been over-conservative in its projections? Or, are bankers over-optimistic about the health of their borrowers? What is the real scene? India’s highest court has the answer.

In September 2020, hearing a batch of petitions seeking interest waiver on loan moratorium granted by the RBI, a Supreme Court bench said the banks should not declare accounts as NPAs for two months and must not take coercive action against borrowers. The bench also said the accounts not declared NPAs till August 31 should not be branded as NPAs till further orders. No one knows when the final order will be passed.

The RBI in March 2020 permitted all commercial banks, co-operative banks, financial institutions and non-banking financial companies, including housing finance companies and micro-finance institutions, a three-month moratorium on payment of term loan instalments as on March 1, 2020. The moratorium on term loans and deferment of interest payments on working capital were not to be treated as default by the borrowers even as the lenders would follow the so-called standstill arrangement in respect to all loan accounts serviced till March 1. They should not be classified as NPAs even if they are not repaid. Under norms, when a loan is not serviced for 90 days, it turns bad.

Later, the moratorium was extended by another three months, till August 31.

Around the same time, all proceedings against loan defaulters under the Insolvency and Bankruptcy Code (IBC) were suspended, initially till September 2020 and later, through two extensions, till March 24, 2021.

The decision should come fast. A prolonged status quo is hurting the credit discipline almost the same way that farm loan waivers do

The borrower’s plight was also addressed by an RBI-appointed expert panel, led by KV Kamath, which recommended certain norms for the banks to resolve stressed loan accounts in 16 sectors, most hit by the Covid pandemic.

All these measures helped the borrowers conserve ca­sh and prioritise essential spending such as paying salaries to their employees and keep­ing their operations going. Like­wise, individual borrowers could brea­the easy on their EMI obligations even if there was any disruption on their paycheck. On top of these, an emergency credit-linked guarantee scheme has given money to those in need, credit risks notwithstanding.

It has been a disruptive 12 months since March 2020. The economic recovery has been uneven with certain sectors recovering faster than others. It’s time to calibrate the banking sector’s response to the borrowers’ needs if we care for banks’ health, which can contribute to a faster recovery.

Media reports suggest that the IBC suspension may end later this month. Last week, the RBI also asked banks and other financial institutions to report their Covid-19 related loan restructuring to the credit bureaus, in a different format. All such developments are fine but the status quo on asset qualifications is queering the pitch. This is creating an arbitrage opportunity and not all of them who can service their loans are doing so. 

With the matter being heard in the nation’s highest court, the lenders are not pushing hard those borrowers who can pay but aren’t. As no fresh NPA has been recorded since March 2020, banks are looking handsome but the good time will not last long. Meanwhile, the credit culture is being distorted. A section of the borrowers is taking advantage of the status quo and showing a very high degree of behavioural opportunism, by not paying the banks their dues even if they can.

When will the Supreme Court deliver its verdict? If it comes by March end, there is bound to be a sudden spike in bad assets as the lenders will have no time to chase such borrowers.

(Indeed, most borrowers have been servicing their loans in the past few months with the rise in cash flow and normalcy returning to their businesses but many did not pay for months last year. They are not clearing their past dues now even if they can. This will force the banks to classify them defaulters if the non-payment is for three months or more.)

The sudden spike in NPAs is based on the presumption that the apex court will lift the status quo by the end of the current financial year and ask the banks to follow the rule book on asset classification. It can leave it to the RBI, and the regulator may extend the 90-day asset classification norm. The court can also extend the status quo, spilling it over to the next financial year. In both cases, there’s nothing to worry now as the banks will be able to postpone the inevitable. 

The Supreme Court’s decision should come fast. A prolonged status quo is hurting the credit discipline almost the same way that farm loan waivers do. With the economy limping back to the growth territory in the December quarter, the focus should be on strengthening the credit flows to help faster recovery. Wary of borrowers’ opportunism and distorted credit discipline, banks may not come forward to lend even if we shout ourselves hoarse from the rooftop over their risk averseness.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd | Twitter: TamalBandyo | His latest book is Pandemonium: The Great Indian Banking Crisis