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Loan recasts to only defer problem, not solve it: S&P

by the owl speaks

Amid reports of the RBI mulling restructuring of loans, global rating agency S&P on Tuesday said that a loan recast would only defer recognition of NPAs and not solve the problem.

The agency also said operational outages and the recession because of the pandemic will have a deeper and longer impact on lenders than previously assumed, and estimated the gross non-performing assets ratio to rise up to 14% in FY21 from the 8.5% in FY20.

“The COVID-19 pandemic may set back the recovery of India’s banking sector by years, which could hit credit flows and, ultimately, the economy,” the agency said.

The pandemic has led to prolonged lockdowns and a chilling of economic activity, forcing the RBI to declare a six-month voluntary moratorium on loan repayments till September.

It pointed out that in the past, rampant restructuring had led the RBI to come up with an asset quality review and withdrew forbearance on the majority of restructured loans, leading to exceptionally high credit costs on banks.

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