India’s central bank will sanction lenders to restructure stressed loans to small businesses, a departure from its five-year old policy of rejecting extensive corporate debt overhaul. According to a statement by the regulator, the bank will permit one-time loan restructuring to micro, small and medium-sized enterprises in default. The loan should not exceed Rs 25 crore ($3.6 million) in order to be eligible for the procedure. This new development is the first major policy move by present RBI governor Shakikanta Das and is in conformity with the government’s announcement to assist small firms, many of which are still reeling from Prime Minister Narendra Modi’s 2016 demonetization drive. As per SBICAP Securities Ltd. data, loans amounting to Rs 1.3 lakh crore ($18.7 billion) are stressed.
According to ASV Krishnan, vice president of SBICAP Securities, the major problem associated with such forbearance schemes is that these could end up corrupting the repayment culture of honest small and medium business owners, by encouraging defaults. However, it is hoped that the bank’s precondition for borrowers would discourage further non-repayment or existing defaults by insolvents. In a recent notice, RBI requested loaners to set aside an extra five percent for the arrears that would be restructured under the programme. Anil Gupta, vice president of ICRA Ltd., noted that banks would have to provide an additional Rs 5,000 crore for the scheme.
Bad loan ratio of the Indian banking sector fell in September 2018 for the first time in the last three years, with the central bank predicting a drop from 10.8 to 10.3 in March in its latest financial stability report. Swaminathan Gurumurthy, CA and member of the RBI board commended the bank’s move. Kotak Institutional Equities said that although the timing was unexpected, public banks under RBI’s Prompt Corrective Action framework will be benefitted by the programme.