The success of the Reserve Bank of India’s decision to allow lenders a one-time restructuring of loans availed by corporate borrowers will ultimately hinge on the timeliness and terms of the restructuring of debt by banks, Crisil Ratings said.

Observing that the move would help ease liquidity pressure on companies amid the COVID-19 pandemic, Crisil said rating action would, however, depend on how quickly lenders act.

‘Multiple situations’

“Debt restructuring can lead to multiple situations and likely rating actions,” said Subodh Rai, Senior Director, Crisil Ratings. “Crisil recognises default on the first instance of missed payment on a rated instrument. Therefore, any stoppage of debt servicing without final documented approval of the respective bank may lead to rating action,” he added.

As per the RBI, the restructuring window will be open only for companies which are under stress due to COVID-19 and which were classified as standard, but were not in default for more than 30 days with any lender as on March 1. Given that the moratorium announced by the RBI will end on August 31, 2020, and the cash flows across a vast majority of rated entities are taking time to normalise, timely support from the lenders in terms of approving restructuring plans quickly will be critical to avoid sharp credit cliffs, the rating agency said.

“Several corporates are likely to explore the opportunity to restructure their loans in order to conserve liquidity, especially given the continued weakness in demand amid economic recession,” noted Crisil, which covers over 18,000 large to mid sized corporates and financial institutions.

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