Loan remakes need to be personalized to avoid permanent greening – The New Indian Express


Most financial crises arise not from what we know, but from what we don’t know. Given the sluggish economy, the industry, the finance ministry and the banks are collectively pushing for forbearance with a one-time loan restructuring proposal. But the RBI, which has already announced a six-month moratorium to ease the burden on borrowers, should be extra careful to avoid repeating the mistakes of the past. Loan restructuring enables favorable repayment terms, delays defaults and prevents new bad loans and high provisioning, which in turn affect bank profitability.

But we should pay attention to the warning from RBI Governor Shaktikanta Das last year, albeit in a separate context, when he spoke of the Cobra Effect, where a well-intentioned solution ends up making the problem worse. Especially since the banks have already testified themselves. Much of the current bad debt problem was a by-product of a similar one-time restructuring exercise a decade ago to weather the global financial crisis of 2008. 2015, when the central bank cracked the whip. Even now, banks are allowed to restructure loans, but not without designating them as NPAs and it is this aspect that lenders want the regulator to relax.

From an industry perspective, giving in to demand is essential to their survival, but the RBI should be wary of the underlying stress build-up as the banks shoulder a large chunk of the Rs 21 lakh crore economic package. through loan guarantees and emergency lines of credit. The regulator must therefore carry out stress tests at the level of banks to determine their resilience and the realistic losses they can bear in unfavorable Covid foreclosure scenarios. In addition, a sensitivity analysis of bank balance sheets should assess the likely depletion of capital and the need for capital later. The RBI should also effectively prepare banks to normalize their operations when the crisis subsides without overheating the system with aggressive lending as in the past. Finally, loan remodels should be personalized based on an individual borrower’s cash flow to avoid permanent greening of loans. Such granularity is essential because the hidden risks will not hide forever.

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