Debt recast may reduce transparency, hinder capital raising: Fitch

Topics Fitch | Debt recast

For PSBs, the scheme was likely to be insufficient to mitigate anticipated risks without further capital support from the government
Global rating agency Fitch said today that the debt restructuring move in India, while giving room for building buffers, may reduce transparency about asset quality and hinder raising of capital.

The Reserve Bank of India’s policy to allow debt restructuring could open a window for banks to build capital buffers while putting off full recognition of the coronavirus pandemic’s impact on loan portfolios. But, it is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks, Fitch Ratings.

India’s 2010-2016 experience with permitting broad-based debt restructuring was characterised by poor implementation and weak monitoring.

Now in 2020, the rescheduled loans are permitted to be classed as “standard assets”, even if they became impaired between 1 March and the implementation of rescheduling.  

It said the scheme may have been designed to give banks more time to raise capital to address the impact of the crisis on loan portfolios. A number of Indian banks - both state-owned and private - have announced capital-raising plans.

However, for state-owned banks these moves were likely to be insufficient to mitigate anticipated risks without further capital support from the government. Most public sector banks would struggle to maintain a 6.125 per cent common equity Tier-1 (CET1) ratio under a high-stress scenario.

Raising capital remains challenging in the current environment. The new policy will reduce transparency over asset quality, which could further hinder some paths for capital-raising.

Private investors may be more reluctant to participate in the sale of stakes in state-owned lenders until the impact of the pandemic on their balance sheets is clear, Fitch added.

Delaying recognition of problems in the banking sector could provide some short-term support to economic growth by stimulating credit issuance, it added.

The central bank has looked to address concern over poor implementation and weak monitoring by tightening supervision through an Expert Committee. The panel which will vet all restructuring plans involving creditors with more than Rs 1,500 ($200 million) of debt. However, this does not address the issue of oversight for most retail and MSME lending restructured under the program.

Retail and MSME will account for a substantial portion of the future asset-quality stress linked to the pandemic. There is also a risk that the restructuring policy could undermine the insolvency and bankruptcy code, established in 2016, by side-lining the legal process that it set up, it added.

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