Loan resolution may give short-term respite

RBI measures will lower credit cost, but analysts are sceptical of asset quality of such loans

The Reserve Bank of India’s (RBI’S) measures towards resolving the Covid-19 stress and restructuring of MSME (micro, small and medium enterprises) advances in light of the economic disruptions, announced i n Thursday’s monetary policy, enthused investors in bank and nonbanking financial company (NBFC) stocks. The Nifty Financial Services index gained 2 per cent intraday.

There is little doubt that restructuring provides a breather when bank and NBFC stocks were struggling to retain investor support amid potential escalation in credit costs (provisioning as a percentage of loan book). In fact, restructuring of personal loans was a surprise for the Street, which was already anticipating restructuring of MSME advances.

However, some analysts believe this is just a temporary respite. According to Kajal Gandhi, analyst at ICICI Securities, “While the restructuring/resolution would lower lenders’ credit cost to some extent, this would postpone lenders’ asset quality pressure.” The asset quality pressure would linger for 2-3 years as some of the restructured loans might again slip into NPAS, she added.

Bunty Chawla, analyst at IDBI Capital, shares a similar view. “The worry is how the restructured book behaves in the medium term,” Chawla says.

Notably, following the 2008 global crisis, when the RBI had allowed special restructuring, a sizeable chunk of such loans had turned bad a few months later, which Chawla also alluded to.

However, the degree of impact this time might not be the same as the crisis is very different from earlier ones. In fact, despite banks becoming more prudent, raising capital and cleaning up of books to some extent in recent years, the impact could still be significant.

This explains why the Nifty Financial Services index ended with only 1 per cent gain on Thursday.

For now, brokerages don’t expect significant change to their FY21 credit cost estimates for banks and NBFCS. However, some analysts believe FY22 and FY23 credit cost estimates could see downward revision, depending on the quantum and quality of the lenders’ books that are restructured. While some broad parameters have been announced, analysts are also awaiting detailed guidelines of the RBI expert committee.

The RBI has also increased loan-to-value (LTV) ratio for gold loans, but only for banks. Not surprisingly, stocks of Muthoot Finance and Manappuram Finance, after surging intraday, fell by 2.8-5.4 per cent. For banks, while the higher LTV ratio increases scope to expand their gold loan book, the jury is out on whether banks will utilise the opportunity, as gold prices are recording new highs.