Moody’s Calls RBI's New Asset Recognition Norms Negative for Banks

The Reserve Bank of India’s recent asset recognition norms that allows banks not to treat real estate loans as restructured for one year is credit negative for Indian banks, a report by Moody’s said.

Last week, the RBI harmonised guidelines for deferment of date of commencement of commercial operations (DCCO) for projects in non-infrastructure and commercial real estate (CRE) sectors.

It said the revisions of the date of DCCO and consequential shift in repayment schedule for equal or shorter duration will not be treated as restructuring provided the revised DCCO falls within the period of one year from the original DCCO stipulated at the time of financial closure for CRE projects.

In case of CRE projects delayed for reasons beyond the control of the promoter, banks may restructure them by way of revision of DCCO up to another one year and retain the ‘standard’ asset classification if the account continues to be serviced, the RBI said.

“The measure is credit negative for Indian banks because it will defer the recognition of such loans from the real estate sector, and by extension appropriate loss provisioning against them,” Moody’s said.

It said property developers will have an additional year to address their funding issues before the banks have to classify a loan as restructured.

“While this will alleviate near-term asset quality risk to the banks from the real estate sector, it will not address the credit issues facing real estate developers,” it said.

Developers are facing funding challenges because nonbank financial institutions (NBFIs), the key lenders to the sector, are facing funding challenges of their own.

Tight funding conditions are straining developers’ ability to complete projects, and by extension their solvency, the report said.