Veteran bankers Deepak Parekh and Uday Kotak today made a pitch to the Reserve Bank of India Governor to consider a proposal for a one-time restructuring of loans for the banking industry. Bad loans at banks are set to rise because of many businesses suffering huge losses in the wake of the COVID pandemic.

Restructuring is a practice that allows banks to modify the terms of the loan when the borrower is facing financial stress. Banks do that to avoid the borrower being declared a defaulter and the loan having to be classified as a non-performing asset. If a borrower is declared defaulter, other banks will be hesitant to lend money. For the bank, classifying a loan as NPA means having to set aside money for it, which will erode profits.

Like most senior banking officials, both Parekh and Kotak too have publicly spoken about the need for such a scheme, and reiterated the point during a Confederation of Indian Industries (CII) council meet today

“There is a growing view across the (CII) membership of a need for one-time restructuring,” Uday Kotak, President of CII and CEO of Kotak Mahindra Bank said in his comments to the RBI Governor.

Also read: One-time restructuring of loans, why banks want it, and why RBI is wary

The Chairman of HDFC Limited, Deepak Parekh too backed the suggestion, saying the issue was critical to the health of banks.

“If we look at the future, look at this time next year, if restructuring is not given then the amount of NPAs in your own report is 12.5 percent by March 2021 or it could even be 14.7 percent…If we allow restructuring like we had done in 2008, it is worth considering to save future problems,” Parekh said.

Responding to Kotak's and Parekh’s comments on restructuring, Governor Shaktikanta Das said in jest that the idea was garnering a “lot of interest.”

However, he was non-commital, other than saying that he had made note of all suggestions.

The clamour for allowing a one-time restructuring of loans without banks having to classify it as a non-performing asset (NPA), has been growing by the day. This because banks fear that many businesses and individuals will may default on their loans because of poor demand for goods and services, and job losses.

RBI estimates bad loans in the banking sector may rise to as high as 14.7 percent of all loans, in a worst-case scenario by March 2021. The banking sector’s gross non-performing loans stood at 8.5 percent as of March 31, 2020.

The Finance Minister had earlier also indicated that the government was open to the idea of loan restructuring. At a conference organised by the Chennai International Centre in the month of May, Finance Minister Nirmala Sitharaman said, “an intense engagement is on with the RBI to come up with such (one-time restructuring) scheme. There is a lot of stress now.”

So far, the Reserve Bank of India has kept its cards close to the chest. Not once has the regulator commented on whether it is in favour of or against such a scheme or not. CNBC-TV18 had earlier reported that the RBI is considering a recast proposal, but is likely to reveal the details only closed to August end.