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Third wave could revive the demand for restructuring of loans: ICRA

Third wave could revive the demand for restructuring of loans: ICRA
Written by Publishing Team

The ICRA has warned that the threat of a third wave of Covid-19 threatens the asset quality of banks, especially the restructured loan book.

The credit rating agency said the third wave could revive demand for loan restructuring, including those already restructured.

Anil Gupta, Vice President – Financial Sector Ratings, ICRA said: “With the increasing prevalence of the new Covid-19 variant, Omicron, there is a high potential for a third wave.

“As banks have restructured most of these loans with a deferment of up to 12 months, this book is likely to start coming out of the moratorium from the fourth quarter (January-March) FY 2022 and Q1 (April-June) FY 2023.”

He added that the third wave poses a great risk to the performance of borrowers who were affected by the previous waves, and therefore it poses a threat to the trend of improving asset quality, profitability and solvency.

The agency indicated that banks executed about 83 per cent of the total applications (76 per cent for public sector banks/PSBs and 86 per cent for private sector banks/PVBs) received under Covid 2.0, resulting in an overall restructuring of ₹1.2 crore of loans. Until September 30, 2021.

At its discretion, as requests for restructuring can be executed until December 31, 2021, the additional restructuring could increase by 15-20 basis points from current levels. One basis point equals 0.01 percent.

The third wave could revive the demand for restructuring loans, including those that have already been restructured. In such a case, the performance of the restructured loan book, which was forecast earlier in FY2023, may now be expected to be seen in FY2024 as the moratorium on existing restructured loans can be extended,” Gupta said.

The ICRA noted that with the additional restructuring under Covid 2.0, the restructured general benchmark loan book for banks increased to 2.9 percent of the standard advances as of September 30, 2021 (two years on June 30, 2021). 1.0 and 2.0.

The agency has assessed that the restructuring under Covid 1.0 is estimated at 34 per cent (or Rs 1 crore) of the total restructured standard loan book of Rs. 2.85 lakh croref for the banks as of September 30, 2021, while the restructuring under Covid 2.0 is estimated at 42 per cent ₹1.2 crore. The balance consists of micro, small and medium enterprises (MSME) and other restructuring operations.

Moreover, as per ICRA estimates, 60 per cent of the total restructuring of ₹ 1lakh crore under Covid 1.0 was accounted for by companies and the balance (or.

“Hence, the restructuring under Covid 2.0, which was available to individual borrowers and MSMEs, was 3 times that of the restructuring under Covid 1.0.

“The absence of a loan repayment freeze, as announced by the Reserve Bank of India (RBI) during Covid 1.0, led to higher restructuring under Covid 2.0,” the agency said.

The authority considered that public sector banks were relatively more docile to the restructuring requests of borrowers with their restructured books amounting to 3.2 percent of standard advances compared to 2.2 percent for private sector banks (PVBs).

The restructuring also upgraded the accounts that were going down earlier. This, along with a significant recovery from Dewan Housing Finance Limited (DHFL) in the second quarter of fiscal year 2022, has led to the highest payback rates and upgrades for banks in the past three years,” according to the agency..

As a result, despite a high overall slip rate of 3.2 percent in the second quarter (July-September) FY 2022 (3.5 percent in the first half/April-September FY 2022 and 2.7 percent in FY21), it remained Total and net non-operating advances remain unchanged. downtrend.

The ICRA assessed that the slip rate and repayment rate were significantly higher for PVBs than PSBs, which could mean that the moratorium offered by public banks is likely to be higher than that provided by PVBs.

This can also be explained by the lower level of dual loan restructuring (ie, loan restructuring under Covid 1.0 that were restructured under Covid 2.0) to public banks because a longer deferral would have avoided the need for a second restructuring.

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