Given the stress in industry following the shortage of cash, banks may be allowed to classify loans as standard assets even if interest payments are overdue by more than 90 days. This forbearance by the central bank would be allowed particularly for companies in the Small and Medium Enterprise (SME) sector, which has been badly disrupted due to inadequate availability of cash.
The move would help alleviate stress in the SME sector, which primarily depends on cash for transactions. Sources in the finance ministry said the more lenient asset classification norms might also be applicable to borrowers from other sectors whose businesses have been affected by demonetisation. On November 8, the government said notes with a denomination of Rs 1,000 and Rs 500 would no longer be legal tender.
“SMEs, who depend on collections in cash, have been hit and therefore a window of forbearance will certainly help them,” an official said, adding that banks with substantial exposure to the sector could see a surge in bad loans without the leniency. The total recognised stress at state-owned banks increased to 15% at the end of September, even though large corporate account slippages declined. Mid-sized corporates and SMEs contributed up to 80% of the incremental stress in the September quarter.
“Disruptions post the demonetisation are likely to add to the asset quality stress for the financial system, particularly for lenders exposed to commercial real estate, loan against property and SME sectors,” analysts at CSFB wrote in a report.
Source: The Financial Express
