Focus: GS-III Indian Economy
Why in news?
A one-time debt restructuring allowed by the Reserve Bank of India (RBI) to help lenders and borrowers amid the COVID-19 pandemic will prolong uncertainty about the banking sector’s asset quality, Fitch Ratings said.
- The policy could open a window for banks to build capital buffers while putting off full recognition of the coronavirus pandemic’s impact on loan portfolios, but is reminiscent of a strategy adopted over 2010-2016 that delayed and exacerbated problems for the banks.
- Indian banks are saddled with more than $120 billion in bad loans and the sector is ranked the third-worst among 13 major world economies in asset quality
- The central bank has set up a committee to oversee restructuring plans involving creditors with more than 15 billion rupees of debt, but that is likely to leave out lending to retail and small- and medium-sized firms, which Fitch said is likely to account for a substantial portion of future pandemic-linked asset quality stress.
Lessons from the past
- The central bank’s experience with loan restructuring in the past hasn’t been encouraging.
- In several instances the restructuring method was used for evergreening of loans, a practice in which banks provide additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans.
-Source: Thet Hindu, VCCircle