RBI announces key relief measures
Significantly cushions systemic asset quality; medium-term overhang may remain
* The Reserve Bank of India (RBI) has announced a resolution framework for accounts adversely impacted by the COVID-19 outbreak. However, it has prudently allowed only those accounts that were standard, but not in default for more than 30 days as of 1st Mar’20, to be eligible for this.
* The RBI also constituted an expert committee led by Mr Kamath to suggest a list of financial parameters to be factored in the assumptions of the resolution plan and validate the resolution plan for all accounts above INR15b.
* Furthermore, the RBI has extended the existing restructuring scheme for stressed MSMEs up to Mar’21. The scheme would be applicable for all accounts that were standard as of 1st Mar’20. We believe this would provide major relief for banks/NBFCs, given the higher moratorium availed in the MSME segment.
* The RBI has also announced other measures. (i) It increased the LTV cap for gold loan disbursements to 90% from 75%. This would be applicable to banks only and allowed up to 31st March 2021. (ii) An additional special liquidity facility of INR50b each would be provided to NHB and NABARD at the policy rate.
* The resolution mechanism would offer massive relief to banks, which would have otherwise faced elevated slippages in 2HFY21. However, this would have its own shortcomings as it delays the stress recognition in the system and would make it difficult to assess the health of the Banking franchise.
Resolution framework announced with high entry barriers
* The RBI has ensured the resolution framework for COVID-19-related stress is applicable only to borrowers facing stress due to the COVID-19 outbreak. Thus, it includes borrowers that are standard, but not in default for more than 30 days (as of 1st Mar’20). The resolution plan should be invoked by 31st Dec’20 and implemented within 90 days from the invocation date for personal loans, and 180 days for other exposures. Furthermore, all borrowers should continue to remain standard until the invocation of the resolution plan. Under the resolution plan, the residual tenor of a loan may be extended by a maximum of 2 years.
* Corporate loan involves multiple lenders: The resolution plan involves the signing of an Inter-Creditor Agreement (ICA) by lenders, representing 75% by value and 60% by number. If the ICA is not signed, the resolution process cannot be invoked again.
* An expert committee headed by Mr K V Kamath would make recommendations on the required financial parameters and sector-specific ranges, and would also validate the resolution plan for accounts above INR15b.
* Furthermore, resolutions in accounts greater than INR1b would require an Independent Credit Evaluation (ICE) by a credit rating agency.
Existing restructuring scheme for MSME extended to Mar’21
* The existing restructuring scheme for stressed MSMEs (which are overdue but standard as of 1st Jan’20) has also been extended to all MSMEs that were standard as of 1st March, but severely impacted due to the COVID-19 outbreak. This restructuring scheme shall need to be implemented by Mar’21. We believe this measure would be a big relief for MSMEs. It would give breathing room to companies facing cash flow strain to revive and reorganize their businesses. Furthermore, it comes as a massive relief for banks, which would have otherwise witnessed elevated slippages given the higher incidence of moratorium availed in this segment.
Prudent provisioning at 10% where resolution plan implemented; 20% for lenders not signing ICA
* The RBI has further announced prudential provisioning norms where the resolution plan is implemented @10% (20% for lenders that do not sign the ICA).
* Furthermore, 50% of provisions could be reversed if the borrower pays at least 20% of the outstanding debt without slipping into NPA post the implementation of the plan. The rest of the provisions could be reversed upon payment of additional 10% of residual debt by the borrower.
Increase gold loan LTV cap to 90% for banks; modest impact for gold NBFCs
To help the borrowers tide over temporary cash flow mismatches arising out of COVID-19, the RBI has increased the LTV cap on gold loans by banks to 90% from 75%. However, this is applicable only up to 31st March 2021. While this is not applicable to NBFCs, we do not believe there would be a meaningful impact on them as: (a) several customers still avail loans at 60–65% LTV despite the threshold of 75% and (b) banks may be reluctant to lend at 90% LTV given the high risk involved and the sharp increase in gold prices. That said, there could be a transition of ~5% of customers from NBFCs to banks.
Providing additional support to refinance agencies
In April 2020, the RBI announced an INR500b liquidity facility, INR250b of which was for NABARD, INR150b for SIDBI, and INR100b for NHB. To further support these agencies, the RBI announced an additional liquidity facility of INR50b for NABARD and INR50b for NHB. We believe smaller HFCs are likely to benefit from this move, while the impact on other NBFCs is likely to be modest.
Valuation and view
The resolution mechanism would provide massive relief to banks, which would otherwise have faced elevated slippages in 2HFY21. However, this would have its own shortcomings as it delays the stress recognition in the system and would make it difficult to assess the health of the Banking franchise. Overall, we believe large private banks are already holding COVID-19-related provisions and additional contingent/floating provisions, while the moratorium book ranges at 10–20%. Therefore, we do not expect the 10% provisioning norm on resolution accounts to significantly increase the provisioning requirement. However, midcap banks could see elevated provisions due to this provisioning norm. We maintain our preference for large banks – ICICIBC, HDFCB, and SBIN.
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