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Reality dawns on banks after data shows RBI’s recast out of bounds for most of India’s bad loans


The Reserve Bank of India’s one-time loan restructuring plan, announced on August 6, has got off to a rough start. Besides the issues banks have with certain criteria in the debt recast scheme, all is not well in the resolution framework committee either.

Amid an ongoing squabble over the choice of KV Kamath as the recast panel chief, latest calculations have shown that there are more problems about to unfold than the RBI cares to admit.

It is worth mentioning here that the All India Bank Employees’ Association (AIBEA) on Monday sought a review of RBI’s decision to have Kamath head the expert panel owing to concerns over his alleged role in the ICICI Bank-Videocon loan controversy.

On top of that, latest data now suggests that teething troubles have already started for the one-time debt recast, with stressed loans worth as much as Rs 5.7 lakh crore unlikely to be eligible for any relief, a Mint report said quoting bankers.

For banks, the issue begins with accounts excluded from restructuring. One criterion to avail RBI’s scheme is that the borrower should not be in default for more than 30 days as of March 1, 2020. This rule will leave a sizeable number of special mention accounts (SMAs) out of the ambit of the loan recast.

“The economy has been passing through tough times in the past two years, especially MSMEs (micro, small, and medium enterprises),” Punjab National Bank’s MD and CEO SS Mallikarjuna Rao told Business Standard.

“We have seen that repayments generally came at the last minute and a majority of stressed accounts wouldn’t slip into NPAs (non-performing assets) as the money is paid before it. We need to look at such customers too,” he added.

SMA-1 are accounts with repayment overdue for 31-60 days, SMA-2 are accounts with repayment delay of 61-90 days, and a delay beyond that becomes an NPA. The central bank’s debt recast only aids SMA-0 accounts with payments delayed up to 30 days.

For MSMEs with exposure of less than Rs 25 crore, all SMAs can avail the recast. But in any other case, recasting SMA-1 and SMA-1 is not possible without classifying them as non-performing assets (NPAs).

“The window will be denied to those, including MSMEs with exposure of above Rs 25 crore, who have defaulted on payments of more than 30 days. We need to look into these issues,” Rao said. He asserted that PNB’s priority amid the recast will be SMA-2 accounts, which is the most stressed category and can become NPAs by the end of September.

Banks have been able to reduce SMA-1 and SMA-2 loans via recoveries and write-offs over the past year. State Bank of India (SBI) had Rs 1,750 crore of SMA-1 and SMA-2 loans as on 30 June, against Rs 7,266 core on 31 March.

Loan restructuring under the recast scheme can be sought till December 31. According to industry estimates, the total quantum of loans availing recast is around Rs 5-8 lakh crore.


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