As the end-August deadline approached for India’s blanket loan repayment moratorium to end, the Reserve Bank of India bought time by rejigging a 2019 restructuring program. The new plan’s emphasis is on “preservation” of the banking sector through preserving pretend classification. Prior to the new scheme, the RBI expected non-performing assets to soar from an already high 8.5% of lending in March to 12.5% by March 2021 due to the pandemic. The troubled state banks’ ratio was forecast to top 15%, more than double private competitors.

The new “one-time” loan forbearance program comes as the government already stepped in with non-bank lines as it struggles with the economic and financial sector fallout from the pandemic. Overdue capital injections into public banks are unlikely or will be minimal this year as the combined state and federal fiscal deficit surges above 10% of GDP. The July announcement that more than half the remaining 12 state banks will be privatized without offering specific terms or timetable met with investor skepticism. The public lenders’ plans to raise some USD 6 billion from the stock market near-term are seen as ambitious with negative performance to date. Sudden market divestiture would further dent depositor confidence after consecutive scandals, and raters have indicated downgrades would be likely as grades stand on expected state support.

The extended loan restructuring wheeze simply kicks the can down the road. Loans that were still classified as “standard” on March 1 are eligible and there are specific time limits. Minimum provisioning is inadequate at only 10% and the RBI formed an “expert committee” to judge large company loan rescheduling without criteria. History illustrates, in India and elsewhere, that restructured loans are more likely to default. With the economy projected to shrink at least 5% this fiscal year on rising inflation, private banks have managed to raise capital. Another loan restructuring leg simply delays for months at a time the inevitable cleanup and cleaning out of long-troubled state lenders.


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