The Reserve Bank of India will now ease bad loan recognition norms to 180 days from the current 90 days. The regulators have also been asked by the IBA (Indian Banks Association) to extend a moratorium on loans and the standstill on stressed accounts by at least one more quarter. Banks have made sure that loans are extended to overdue accounts to be considered under the standard category, or classified as standard reorganized assets. Along with this, a one-time modification of loans and a specific term loan package will be provided for sectors that are under stress due to the emergency situation.
A non-performing asset (NPA) also known as ‘bad loan’ is a loan that has remained due for a specified period of time. Many loans become non-performing after being in default for 90 days, but this also depends on the terms mentioned in the contract. The banks try to collect the payments for such loans to get it back on the current state. However, some of the loans will be prolonged and eventually file for bankruptcy. Most banks will try to recover whatever they can from the mortgaged assets and write off the remaining amount as loss.
The pandemic impact on the Indian economy led to the introduction of schemes launched by the government to contain the problem. According to India Ratings, pandemic may drive total slippages of banks by up to Rs. 5.5 lakh crore in this round. Falling revenues made it difficult for companies to generate enough cash flows to pay back their lenders. The banking system is already burdened with Rs. 8 lakh crore worth of NPAs. The nationwide lockdown that began in late March is still largely in effect in most parts of the country.
However, the lockdown caused the number of unemployment in the country to spike, ultimately impacting the repayment ability of the borrowers and may also bring down the demand for new loans. The economic impact of pandemic on India is still a big source of uncertainty but the impact is expected to be huge and can potentially drop the GDP to a negative zone. Before the lockdown, some bad loan transactions were happening in full cash, a preferred bet for banks/NBFCs. The usual fund flows from factories have been blocked due to lack of normal production. This defeats the concept of smooth business operation and making profits which is crucial for higher valuations.
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As part of the economic package, the government of India announced a series of loan schemes. Some of these loan schemes are backed by government guarantees to small industrial units and non-banking finance companies (NBFCs). These schemes aim to offer relief to the businesses facing stress due to the lockdown. These economic packages of Rs. 3 lakh crore for micro, small and medium enterprises (MSMEs). Borrowers with up to Rs. 25 crore outstanding and Rs 100 crore turnover are eligible for this scheme. Read more about 3 Lakh Crore Emergency Credit Line Scheme.
The Government also introduced the “Atma Nirbhar Bharat Abhiyan” package that offers Rs. 20 lakh crore to ease the stress on the small businesses. But this economic package is only a liquidity relief given through banking channels that have arguably failed to give a push to demand. Without demand creation, the government is simply pushing additional credit to the industry that will start to build bad loan burdens on the banks.
Businesses will be using this money to pay up their existing obligations and not as an additional business loan. Ultimately, loans are not free money; these loans have to be repaid. If this money is not repaid it will get added to the bad loan book of the banks. The build-up of fresh stock of bad loans in the banking sector is entirely dependent on how soon the economy recovers from the impact of the pandemic situation.
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