Banks Gear-Up for Due Diligence in Regards to Loan Recast Programme

Banking organizations and lenders preparing to implement a loan restructuring programme for companies hit by the Covid-19 pandemic are conducting a detailed study of cash flows and the viability of businesses, bankers aware of the thinking said. The KV Kamath committee, which was tasked by the Reserve Bank of India to provide sector-specific recommendations on a one-time loan recast package has announced (for borrowers) that it has identified six problem sectors, including aviation, realty, automobiles, infrastructure and power.

The committee is likely to suggest separate restructuring rules for the top six stressed sectors and has suggested solutions for 29 of the 307 sectors it has assessed. The panel has also suggested that the two-year cut-off for restructuring should begin after implementation of the resolution plan. “The committee has assessed those sectors which have been worst affected by the pandemic and suggested remedies; it is not delving deeply into those sectors which were already in trouble prior to March,” stated a banker who is aware of the deliberations of the committee. “The committee has taken at least 20 representations from lenders and many of those suggestions could be a part of the final report,” the banker said on condition of anonymity.

The committee has taken at least 20 representations from lenders and many of those suggestions could be a part of the final report

Stressed sectors could either benefit from easier repayment terms or a much deeper restructuring, based on the analysis of their sustainable and unsustainable debt. The recommendations will aim to ensure that businesses overcome the current difficulties and grow as the economy goes back to normal, bankers said. Minister of Finance of India, Nirmala Sitharaman has separately asked banks to frame a scheme by September 15, according to which banks can restructure all retail loans with board approval.

Lenders say that the ongoing loan moratorium case in the Supreme Court could have some impact on their plans to restructure stressed assets. The apex court last week ordered that no account should be declared as non-performing after August 31st till further orders. The next hearing in the case is scheduled for September 10th. “The latest interim order could pose a challenge because it’s still not known what the apex court will decide; this could delay restructuring for those companies who wish to rely on the final judgment in this case,” said another executive of a public-sector bank. According to Macquarie Capital, if interest-on-interest during the moratorium period is waived off, the impact on the banking system could be about ₹15,000-20,000 crore, leading to a single-digit basis point impact on margins, which is manageable.