Context: RBI and  the govt  are  considering  a  one-time restructuring of loans, which includes an extension of the date of recognition of non-performing assets beyond 90 days to help corporates hit by covid-19.

Restructuring of bank loans:

  • Restructuring is a process that allows banks to modify the loan terms when a borrower is facing difficulties. 
  • If a loan is labelled as NPA, then banks will have to set aside more provisions. 
    • Thus banks seek permission to restructure loans to avoid them being classified as non-performing assets. 
  • Mode of restructuring: Restructuring happens through a change in the repayment period, repayable sum, number of installments, rate of interest, rollover of credit facilities, a sanction of additional credit facility or enhancement of existing limits.

RBI’s view on one-time  restructuring:

  • RBI has earlier opposed debt restructuring: This is because banks in the past had to classify restructured loans as standard accounts and set aside lower provisions. 
  • However, RBI has since taken a U-Turn and is now considering this option. 
  • The practice ended in 2015 when governor Raghuram Rajan began an asset quality review of banks, which revealed the divergence between reported levels of impairment and actual positions of large corporate accounts. 

What is the lenders’ take in such a scenario?

  • Banks and corporates have been seeking an extension of the date of recognition of NPA up to 150 days due to the corporate sector distress. 
  • Typically, if a loan is not paid within 90 days, then it is classified as an NPA. 
  • Currently, banks have to set aside 0.4% provision in respect of standard assets and 15% provision in respect of sub-standard assets.

What is the current NPA situation?

  • The lockdown has affected the repayment ability of borrowers and in turn, could affect the asset quality of banks. 
  • According to rating agency Icra, the gross NPAs of banks are likely to worsen to 11.3-11.6% by the end of this financial year from 8.6% as of March 2020, due to disruptions caused by the coronavirus pandemic. 

Will RBI go for a sector-specific restructuring?

  • Reserve Bank of India may look at a restructuring package for all sectors. 
  • However specific sectors like  aviation, commercial realty, tourism, and hospitality business have been severely hit by the coronavirus pandemic. 
  • The data from RBI shows that banks had an exposure of over ₹2.3 trillion to commercial realty, nearly ₹46,000 crore to tourism and hospitality businesses, and over ₹30,000 crore to aviation firms towards the end of April.

Non Performing Asset:

  • NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.
  • A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Substandard assets: Assets that have remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”


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