RBI surprises by reversing its debt revamp stance

Bloomberg

India’s central bank will permit lenders to restructure stressed loans to small companies, breaking from a five-year-old policy of eschewing sweeping corporate debt overhauls.
The Reserve Bank of India will allow one-time restructuring of loans to micro, small and medium-sized companies that are in default, the regulator said in a statement. To be eligible for the program, the loan should not exceed 250 million rupees ($3.6 million), according to the statement.
The latest directive is new central bank Governor Shaktikanta Das’s first big policy move and yields to the government’s call to provide relief to small firms, many of which are still suffering from Prime Minister Narendra Modi’s 2016 cash-ban program.
As much as 1.3 trillion rupees ($18.7 billion) of loans made to small firms are stressed, according to data from SBICAP Securities Ltd.
“The biggest concern with such forbearance packages is the risk that such schemes could end up vitiating the repayment culture of honest MSME borrowers by encouraging defaults,” ASV Krishnan, vice president at SBICAP Securities, said in a note on Wednesday.
Still, the RBI’s precondition for borrowers will “disincentivise any incremental non-repayment or defaults by existing standard borrowers,” he said.
In a notice, the Reserve Bank asked lenders to set aside an additional 5 percent for the debt that will be revamped under the program, which will permit lenders to avoid classifying them as non-performing loans. Banks will have to make an extra provision of 50 billion rupees, said Anil Gupta, vice president, at ICRA Ltd, the Indian unit of Moody’s Investors Service.
Previous governors including Raghuram Rajan and Urjit Patel have shunned loan revamp programs. The central bank’s proposed plan follows loan waivers for farmers announced by a number of state administrations. Patel had called moves to forgive debt a “moral hazard.”
“Looks like we are going back in time,” said ICRA’s Gupta. “You already have the agricultural sector whose credit culture has been spoilt due to farm-loan waivers, now with this dispensation to MSMEs it will have an adverse impact on the credit culture for such borrowers.”
Still, the Reserve Bank’s latest move did have supporters. It was praised by Swaminathan Gurumurthy, a chartered accountant and a key advocate of easier rules for small companies on the central bank’s board. Gurumurthy, who is associated with the economic wing of Rashtriya Swayamsevak Sangh — the ideological parent of Modi’s Bharatiya Janata Party — is a champion of the small traders who are BJP’s key voting bloc.
State-run banks under the Reserve Bank’s Prompt Corrective Action framework sanction will benefit from the move, according to Kotak Institutional Equities. Still, the brokerage said the timing of the move came as a surprise.
The bad-loan ratio in India’s banking industry fell in September for the first time since 2015, with the central bank predicting it may drop further. The industry’s gross bad-loan ratio is expected to fall to 10.3 percent by March from 10.8 percent in September, the Reserve Bank said in its Financial Stability Report.