Third covid wave of could lead to incremental restructuring: ICRA

With incremental restructuring under Covid 2.0, the overall standard restructured loan book for banks increased to 2.9% of standard advances as on September 30, 2021 (2.0% as on June 30, 2021). Most of this restructuring includes borrowers impacted by Covid 1.0 and 2.0. Restructuring under Covid 1.0 is estimated at 34% (or `1.0 trillion) of the total standard restructured loan book of `2.85 trillion for banks as on September 30, 2021, while restructuring under Covid 2.0 is estimated at 42% or `1.2 trillion. The balance comprised MSME and other restructuring.

Moreover, as per ICRA’s estimates, 60% of the total restructuring of `1.0 trillion under Covid 1.0 was accounted for by corporates and the balance (or `0.4 trillion) by the retail and MSME segments. Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers, stood at 3x of the restructuring under Covid 1.0. The absence of a moratorium on loan repayments, as announced by RBI during Covid 1.0, drove higher restructuring under Covid 2.0. Public sector banks (PSBs) were relatively mor e a c c o mmodat i v e w i t h the restructuring requests of borrowers as their restructured books stood at 3.2% of the standard advances vis-à-vis 2.2% for private sector banks (PVBs).

The restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Limited (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the last 3 years. As a result, despite the elevated gross slippage rate of 3.2% i n Q2 FY2022 (3.5% in H1 FY2022 and 2.7% in FY2021), the gross and net NPAs remained on a declining trend.

As can be seen from Exhibits 1 and 2, the slippage rate and repayment rate were much higher for PVBs compared

to PSBs, which possibly means that the moratorium period offered by PSBs is likely to be higher than that offered by PVBs. This could also be interpreted from the lower level of dual restructuring of loans (i.e. loans restructured under Covid 1.0 getting restructured again under Covid 2.0) for public banks as a longer moratorium would have obviated the need for second restructuring.

Banks have implemented ~83% of the total requests (76% for PSBs and 86% for PVBs) received under Covid 2.0, leading to an overall restructuring of `1.2 trillion of loans till September 30, 2021. As the restructuring requests can be implemented till December 31, 2021, incremental restructuring could increase by 15-20 bps from the current levels.