A third wave could revive demand for loan restructuring: ICRA

The threat of the third wave of Covid-19 endangers the quality of banks’ assets, in particular the restructured loan portfolio, the ICRA warned.

The third wave could revive demand for loan restructuring, including already restructured loans, the rating agency said.

Anil Gupta, Vice President – Financial Sector Ratings, ICRA, said: “With the increased spread of the new variant of Covid-19, i.e. Omicron, there is a strong possibility of occurrence. of a third wave.

“While the banks have restructured most of these loans with a moratorium of up to 12 months, this book is expected to start coming out of the moratorium from the fourth quarter (January-March) FY2022 and the first quarter (April-June ) FY2023. “

Therefore, a third wave presents a high risk to the performance of borrowers who have been affected by the previous waves and therefore poses a threat to the trend of improving asset quality, profitability and creditworthiness, a he added.

The agency noted that banks implemented around 83 percent of the total requests (76 percent for public sector banks / PSB and 86 percent for private sector banks / PVB) received under Covid 2.0, leading to an overall restructuring of ₹ 1.2 lakh crore of loans until September 30, 2021.

According to its assessment, since restructuring requests can be implemented until December 31, 2021, the phased restructuring could increase by 15 to 20 basis points from current levels. One basis point is equal to 0.01%.

“The third wave could revive demand for credit restructuring, including already restructured credits. In such a case, the visibility on the performance of the restructured loan portfolio, which was previously expected for fiscal year 2023, can now be expected for fiscal year 2024, as the moratorium on existing restructured loans could be extended ”, said Gupta said.

The ICRA noted that with the gradual restructuring under Covid 2.0, the overall portfolio of standard restructured loans for banks has grown to 2.9% of standard advances as of September 30, 2021 (2% as of June 30, 2021). Most of this restructuring includes borrowers affected by Covid. 1.0 and 2.0.

The agency estimated that the restructuring under Covid 1.0 is estimated at 34% (or ₹ 1lakh crore) of the total standard restructured loans of Rs. 2.85 lakh crore for banks as of September 30, 2021, while the restructuring under Covid 2.0 is estimated at 42% or ₹ 1.2 lakh crore. The balance included micro, small and medium enterprises (MSMEs) and other restructurings.

Moreover, according to ICRA estimates, 60% of the total restructuring of 1lakh croreunder Covid 1.0 was attributable to companies and the remainder (or 40,000) to the retail and MSME segments.

“Therefore, the restructuring under Covid 2.0, which was available to retail borrowers and MSMEs, was 3 times the restructuring under Covid 1.0.

“The lack of a moratorium on loan repayments, as announced by the Reserve Bank of India (RBI) during Covid 1.0, has resulted in a larger restructuring under Covid 2.0,” the agency said.

ICRA estimated that public sector banks (PSBs) were relatively more accommodating with borrower restructuring requests, as their restructured books represented 3.2% of standard advances compared to 2.2% for private sector banks ( PVB).

“The restructuring also led to the revaluation of the accounts, which would have slipped earlier. This, coupled with the strong recovery of Dewan Housing Finance Limited (DHFL) in the second quarter of fiscal 2022, has led to the highest recoveries and upgrades for banks in the past three years, ”according to the agency.

As a result, despite the high gross slippage rate of 3.2% in the second quarter (July-September) of fiscal 2022 (3.5% in the first half of fiscal 2022 and 2.7 % in fiscal year 2021), gross and net non-performing advances remained in effect. a downward trend.

ICRA estimated that the slippage rate and the repayment rate were much higher for PVBs than for PSBs, which perhaps means that the moratorium period offered by public banks is likely to be higher. than that provided by the PVB.

This could also be interpreted from the lower level of double loan restructuring (i.e. loans restructured under Covid 1.0 which are again restructured under Covid 2.0) for public banks, as a longer moratorium would have avoided the need for a second restructuring.

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