Banks discuss moving RBI for standstill clause to avoid NPA tag on Covid-hit companies

Mumbai: Leading banks circulated a note on Wednesday evening to urge the regulator to introduce a ‘standstill clause’ to avoid the NPA tag on companies that restructure loans to overcome slowdown pangs caused by Covid-19.The proposed ‘standstill’ period that will require the approval of Reserve Bank of India (RBI), is between lenders ‘invoking’ the debt resolution regulation on a loan and its ‘implementation’.According to existing regulations, even after invocation — when lenders decide to do a one-time restructuring — the NPA tag will be put on a loan which technically slips into NPA category (or, is overdue for 90 days).Once a loan is classified as NPA, banks have to provide a higher amount (or, take a bigger hit on bottomline). While such a loan — which is going through one-time restructuring but slips into NPA — can be upgraded to ‘standard’ category (from NPA) once the restructuring is executed, banks have to still continue with the higher provisioning. (As against 10% provisioning for standard loans taken up for restructuring, the provisioning for NPA is 15% and 25% for secured and unsecured loans, respectively.) 79673033“More than provisioning, it’s the NPA categorisation that acts as a problem. Once a borrower’s credit history shows NPA, it may be difficult for many banks to deal with it later. This is one of the reasons why loan restructuring for Covid-hit borrowers is not taking off. Banks want the regulator to let the account which is being restructured to be treated as standard till the restructuring is completed,” said a banker.On November 30, 2020, ET had reported that banks are considering moving RBI on the subject. On December 9, bank CEOs in the managing committee of the industry body Indian Banks Association (IBA) exchanged a note before submitting their suggestion to the regulator. “IBA is likely to send the letter to RBI this week. Banks want clarity on how these accounts (which are being restructured but have slipped into NPA) be categorised and provided for in the December quarter,” said another bank official. Among these accounts is a large, reputed Mumbai-based developer group and a leading retailer.According to Abizer Diwanji, partner, EY, “While working with organisations, we have sensed that this is an area of concern. Any interim slippage to NPA between invocation and implementation will trigger higher provisioning and may restrict the availability of credit and impact business of the borrower as well as group entities.”Under the regulatory timeline, the special resolution process (to address Covid-related stress) is ‘invoked’ when lenders representing 75% by value and 60% by number agree to restructure a loan; the invocation must happen not later than December 31, 2020 — a deadline that some banks want the RBI to extend by a few months; lenders have to reach an inter-creditor agreement within 30 days of invocation, and the resolution process has to be completed within 180 days from the date of invocation. Diwanji feels that banks have a valid point as treating an account as ‘standard’ during the intermediary period is aimed towards faster revival and preserving a borrower’s enterprise value.

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