Refinancing Need More Attention from Policymakers

The Reserve Bank of India's decision allowing lenders to restructure loans will increase their refinancing requirements, especially for non-banking banking companies (NBFCs), India Ratings and Research (Ind-Ra) said.

This is in view of their large contractual debt repayments as scheduled cash inflow gets deferred, though their severity will depend upon the proportion of loan portfolio restructured and terms of restructuring (that is complete moratorium versus partial payments).

"While restructuring will relieve the repayment pressure on borrowers and can help them to overcome any short-term stress, it will require sound guardrails and critical assessment of viability so that it is not used as an instrument to postpone the problems as seen previously," said Ind-Ra.

Credit cost pressure gets alleviated since lenders have to provide 10 per cent on the restructured debt. However, this may prove to be inadequate in case the slippages were to be elevated.

"A higher quantum of restructured assets will clearly reflect higher asset quality challenges for NBFCs and can restrict their ability to mobilise funds from banks and capital markets."

At end-June 2020, a substantial portion of the NBFCs loan book was under moratorium. Housing loans had the least portion of the book under moratorium while the wholesale lenders had the maximum portion of their loans under moratorium.

The collection efficiency, reflecting the repayment behaviour of customers, has improved since April with the easing of lockdown restrictions. However, regional lockdowns did impact collections during July.

The collection levels across asset classes and segments were far below pre-Covid levels. Businesses still did not generate cash flows sufficient enough to make their timely debt repayment.

Ind-Ra said a high proportion of loans to certain segments such as real estate developers, commercial vehicle owners and micro small medium enterprises will be restructured, given the weakness in these sectors.

"The situation as far as the spread of virus is concerned is extremely dynamic," it added. "In case of a second wave of pandemic, the situation may turn grim and borrowers may not be able to meet the restructured debt repayment terms, thereby increasing the credit cost and asset quality pressures."