The RBI extending the MSME loan restructuring scheme and allowing relaxation in asset classification for certain real-estate projects signify a gradual shift away from the regulator's earlier effort to enhance quality and transparency of asset classification by banks, Fitch Ratings said on Monday.
There is a risk that such regulatory forbearance will perpetuate moral hazard, as it follows aggressive lending growth and risk-taking in certain sectors in five years to the financial year ended March 2019, the ratings agency said.
"The Reserve Bank of India's (RBI) announcement of forbearance towards stressed sectors signifies a gradual shift away from the regulator's earlier effort to enhance the quality and transparency of asset classification in Indian banking system," Fitch Ratings said.
Last week the RBI allowed restructuring of the borrower account of MSME by one more year till March 31, 2021.
Finance Minister Nirmala Sitharaman in her budget speech had urged the RBI to extend the recast for small businesses and had also taken measures like a Rs 25,000 crore fund for stuck realty projects in her budget.
Micro, small and medium enterprises contribute more than 28 per cent to the total GDP, more than 40 per cent to exports and employ about 11 crore people.
Considering the importance of MSMEs in the Indian economy and for creating an enabling environment for the sector, a one-time restructuring of loans to MSMEs that were in default but 'standard' as on January 1, 2019, was permitted without an asset classification downgrade.
Fitch said the RBI's move mark a further dilution of the regulator's drive to enhance loan recognition.
"It is not clear at the moment whether this forbearance will be extended to non-bank financial institutions (NBFIs) as well, but we believe that the probability of this is high, considering the impact that the NBFI liquidity squeeze and a slowing economy have had on the MSME and real-estate sectors," it said.
Fitch said in recent years, banks have preferred to lend to NBFIs, which lend heavily to the real estate and MSME sectors, as a way to deploy their excess liquidity, while limiting their own direct exposure to these areas.
"Fitch believes that these extensions are only likely to defer asset-quality pressures unless there is a sustained improvement in macroeconomic conditions. Although we expect India's economic growth to pick up in the coming months, to 5.6 per cent in FY21 from 4.6 per cent in FY20, there are still risks to the country's economic outlook," Fitch said.
It said Indian banks have a poor track record with restructuring and the RBI's asset-quality reviews in FY2016 and FY2018 found that a dominant share of loans restructured post-FY2012 had degraded into non-performing loans (NPLs).
On the RBI's move to exempt cash reserve ratio cut against lending to specific sectors like auto, small businesses and housing, the agency said the move is aimed at improving monetary transmission as interest rates on the three products go down, but flagged concers on the same.
"Most of these sectors have had above-average lending growth in the last few years, either directly or indirectly via non-banks, and could be at risk were the economy to slow," it said.
The measure is unlikely to support sustainable credit growth until capitalisation improves meaningfully across banks, in particular among state-owned banks, which account for nearly two-thirds of the sector's assets, it added.
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