RBI considering steps to ease pain of both lenders and borrowers; may do this for stressed firms

The RBI has already extended a repayment moratorium to borrowers for six months through August and has initiated steps to ensure there is enough liquidity in the system.

The Reserve Bank of India (RBI) is considering a proposal to grant a one-time restructuring of loans to soften the blow to both borrowers and lenders hit by the pandemic but a final call is likely to be taken by it in late August or September, a source told FE.

“A decision will be taken only after the first quarter results of banks are out so that both the government and the regulator have a sense of the quantum of stressed loans and the magnitude of the crisis,” the sources said. By that time, authorities will also be able to better gauge the state of demand in the economy, he added.

Based on the results and other high-frequency data, the Reserve Bank of India (RBI), in consultations with the government, will also decide if a one-time restructuring of loans will be the best option or some other relief measures need to be initiated. It will also decide if any such relief will be granted to all entities or only those in select sectors that have been hit harder than the rest, added the source.

However, the central bank is also mindful that the relief should be such that it must not lead to unintended consequences in terms of a fresh and unprecedented bad loan crisis, he said. After the global financial crisis in 2008, RBI had announced a one-time loan recast plan to ease the pain but some analysts had blamed such a move for worsening a bad loan pile-up subsequently.

The RBI has already extended a repayment moratorium to borrowers for six months through August and has initiated steps to ensure there is enough liquidity in the system. In a bid to ensure that credit flow improves, the government has also allayed fears of bankers on various occasions, saying they won’t be prosecuted for honest business mistakes.

Already, while bankers have remained risk averse, many borrowers, too, wanted to take loans only after substantial lockdown-related curbs were lifted so that they could resume manufacturing.

The overall credit growth in the banking sector has continued to moderate for the fortnight ending June 5. The credit growth was nearly at half the level during the last two fortnights at 6.3% and 6.2% respectively, compared with the year-ago level of 12.7% (as of May 24, 2019) and 12.3% (as of June 7, 2019) owing to risk aversion in the banking system coupled with extended lockdown in the highly impacted regions due to Covid-19, according to a CARE Ratings report.

Finance minister Nirmala Sitharaman recently said both the government and the central banks were in talks on relief to borrowers. In a conference organised by the Chennai International Centre last week, Sitharaman said, “An intense engagement is on with the RBI to come up with such (one-time restructuring) scheme. There is a lot of stress now.”