India surprises by reversing debt revamp stance

By BLOOMBERG

MUMBAI • India’s central bank will permit lenders to restructure stressed loans to small companies, breaking from a five-year-old policy of eschewing sweeping corporate debt overhauls.

The Reserve Bank of India (RBI) will allow one-time restructuring of loans to micro, small and medium-sized companies that are in default, the regulator said in a statement on Tuesday. To be eligible for the programme, the loan should not exceed 250 million rupees (RM14.9 million), according to the statement.

The latest directive is new central bank governor Shaktikanta Das’ first big policy move and yields to the government’s call to provide relief to small firms, many of which are still suffering from Prime Minister Narendra Modi’s 2016 cash-ban programme.

As much as 1.3 trillion rupees of loans made to small firms are stressed, according to data from SBICAP Securities Ltd.

“The biggest concern with such forbearance packages is the risk that such schemes could end up vitiating the repayment culture of honest micro, small and medium-sized companies’ borrowers by encouraging defaults,” ASV Krishnan, VP at SBICAP Securities, said in a note yesterday.

Still, the RBI’s precondition for borrowers will “disincentivise any incremental non-repayment or defaults by existing standard borrowers”, he said.

In Tuesday’s notice, the RBI asked lenders to set aside an additional 5% for the debt that will be revamped under the programme.

Banks will have to make an extra provision of 50 billion rupees, said Anil Gupta, VP at ICRA Ltd, the Indian unit of Moody’s Investors Service Inc.

Previous governors including Raghuram Rajan and Urjit Patel have shunned loan revamp programmes.

State-run banks under the RBI’s Prompt Corrective Action framework sanction will benefit from the move, according to Kotak Institutional Equities.

Still, the brokerage said the timing of the move came as a surprise.

“Lenders usually step back lending when the early warning indicators suggest rising trends of deterioration,” Kotak said in a report to clients yesterday.

“However, the last available data suggests that lenders have been quite comfortable and growing this portfolio at a healthy pace.”