Did the restructuring of bad loans done by the Reserve Bank of India a year ago help small and medium enterprises recover and also curtail the build-up of bank’s bad loans, or did it just delay the recognition of bad loans?

According to CARE Rating Agency data, top 12 banks had restructured assets worth Rs 32,530 crore in the first quarter ended June 2009 taking their total restructured assets to nearly Rs 73,000 crore.

In December 2008, the RBI granted permission to restructure accounts that are likely to turn bad. The objective was to give a temporary relief to the industry which was in distress as a result of the liquidity squeeze.

In a recent interview to the media, Mr Subir Gokarn, a Deputy Governor of the RBI, said that while the concept of restructuring cannot be blamed there was a risk that assets that were not fundamentally sound also got the option of being restructured. The threat of large bad debts on the restructured portfolio is clearly something that needs to be watched as there may be stress on some banks, he said.

Move Hailed

The Indian Banks’ Association Chairman, Mr M. V. Nair, who is also Chairman and Managing Director of Union Bank of India, said the restructuring move by the RBI must be appreciated. Industries were reeling under non-payments of dues which was beyond their control and the restructuring helped during the liquidity crunch. This saved not just jobs but also industries, he said.

“If the restructuring had not been done the entire system would have collapsed pushing the economy further into a slowdown,” said Mr R. S. Reddy, Chairman andManaging Director, Andhra Bank. If some banks are showing a build-up of bad loans it is non-payment of the interest installments due from September to December 2009 which were restructured for the previous year; it is not that these accounts have become doubtful but eventually pay when cash flow is better, he said.

Lucky Few

Some industries like auto components have been able to overcome the situation and pay up their dues but some have not. Mr Nair said that, therefore, the possibility of default was lower due to therestructuring.

State Bank of India had restructured standard assets of Rs 16,796 crore, of which Rs 996 crore had slipped into the bad loans category, taking the slippage ratio for these to 5.9 per cent.

Mr S. A. Bhat, Chairman and Managing Director, Indian Overseas Bank, said that the restructuring had little impact on a build-up of bad loans of about Rs 3,000 crore as on December 31, 2009. Of the total restructured loans amounting to Rs 8,200 crore, only Rs 745 crore werebad loans. Of this Rs 600 crore worth of assets would be upgraded to standard assets, he said.

Varying Impact

Mr Milind Gadkari, General Manager, Care Rating Agency, said that the restructuring done by public sector banks exceeded that by their private peers. The restructuring of bad loans as percentage of non-performing assets may vary from one per cent to five per cent depending upon the exposure of the banks, he said.

The RBI’s motive in allowing restructuring of doubtful assets was the right move done at the right time. If the regulator had not intervened and done this, it would have created a crises situation not only for banks but the economy as whole, he said.

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