Banks cling to restructuring hopes in tough year for recoveries

“They may have been repaying with great difficulty before Covid, but in this scenario, they will start to hold back repayments,” the banker added.

With the insolvency law remaining out of bounds for a year, banks are pinning their hopes on a regulatory dispensation for restructuring stressed assets. An existing restructuring scheme for micro, small and medium enterprises (MSMEs) could also come in handy in a year that will have little to offer in terms of recoveries, bankers said.

Unfazed by the absence of any mention of restructuring in the five rounds of briefings held by the finance ministry, industry executives expect the Reserve Bank of India (RBI) to accede to their request for allowing a one-time restructuring of stressed assets without classifying them as bad loans. Sunil Mehta, chief executive officer, Indian Banks’ Association, said loan restructuring and asset classification fall within the domain of the RBI and there is still scope for a relaxation on that front.

At the same time, he said, the extension of the Insolvency and Bankruptcy Code (IBC)’s applicability by a year is certainly a setback for recoveries. “A one-year moratorium on the IBC will definitely affect recoveries from those accounts, which are yet to be admitted as they will now not be admitted for one year. That will definitely impact recovery,” he said.

This year, banks may increasingly resort to an existing debt recast scheme for MSMEs, available till December 31, 2020, which allows the restructured assets to remain standard as long as they were not in default as on January 1, 2020. “This kind of restructuring could happen in a larger number of accounts in coming days. While the repayment moratorium is there for everyone till May, even if the unit opens operations on May 18, it may not be able to pay me the June instalment after just 10 days,” said a senior executive with a mid-sized public-sector bank (PSB).

Repayments from MSMEs could be particularly limited because being small businesses, they will tend to conserve cash till the Covid threat blows over. “They may have been repaying with great difficulty before Covid, but in this scenario, they will start to hold back repayments,” the banker added.

In order to ensure recoveries keep happening, there are some options before banks, Mehta explained. One is to get the RBI’s permission to restructure accounts where the units are functional. The regulator will have to then relax certain norms, such as Section 29A of the IBC, which bars banks from entering into any restructuring deal with a defaulting promoter.

The second option is to look for resolutions outside the National Company Law Tribunal (NCLT). This could involve a stressed company coming up with a compromise proposal and the lenders agreeing to it if they find it acceptable.