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What is the RBI's Loan Restructuring Facility for Personal and Corporate Loans?

Aug 11, 2020 3:01 AM 5 min read

On August 6th, the RBI acknowledged that the stress induced by the COVID-19 pandemic could hamper the ability of borrowers - both businesses and individuals - to repay loans on time. And that therefore it was necessary to put in place a mechanism for lenders to restructure the loans of these affected borrowers.

In this context, a first-of-its-kind one-time restructuring framework for personal and corporate loans has been announced. The restructuring has conditions - which we’ll get to in a bit - but the process would happen without classifying these accounts as Non-Performing Assets (NPAs).

This framework will be available till December 31st 2020 and must be implemented within 90 days of invocation.

Point to Note: The RBI’s moratorium facility for loan repayments ends on August 31st 2020.

Meanwhile, an expert committee led by veteran banker KV Kamath will be formed to suggest ways in which the restructuring can be implemented and submit sector-specific proposals.

What Does “Restructuring” of Loans Mean?

Restructuring loans is a practice where a lender modifies the terms of a loan when the borrower is facing financial stress. This is done to avoid the loan being classified as an NPA and the borrower being branded a defaulter. An NPA classification brings with it the requirement for lenders to set aside funds in lieu of potential losses going forward i.e. Provisions, and increase the “risk weighting” of that particular loan. While the former adjustment hits the banks’ P&L, the latter hits its capital adequacy ratio. If the capital adequacy ratio goes below a certain threshold (say 9%), the bank’s license can be revoked unless it is quickly able to raise regulatory capital from the market.

Hence a relief from this classification means more time for the lenders.

Now, when you restructure a loan you can:

  • Reschedule the loan repayment
  • Lower the interest rate
  • Amend the repayable amount
  • Change the number of installments
  • Convert interest accrued into another credit facility


A Bit of Background

Even before the Central Bank’s announcement yesterday, loan repayment relief schemes were in place. Even a COVID-specific one - but this was limited to MSMEs

But the previous principle-based resolution frameworks for addressing borrower defaults dealt with normal scenarios. And these provisions entailed categorising unpaid loans as NPAs.

The RBI acknowledged that “the economic fallout on account of the COVID-19 pandemic has led to significant financial stress for borrowers across the board”. And extraordinary times calls for extraordinary measures - ergo, the new loan restructuring scheme.


Who is Eligible?

The facility is available only to businesses or individuals suffering COVID-induced stress. Only those borrower accounts which are not in default for more than 30 days with the lending institution as on March 1st 2020 are eligible. Moreover, the following entities are ineligible:

  1. MSME borrowers whose aggregate exposure to lending institutions collectively is ₹25cr ($3.34m) or less (as on March 1st 2020)
  2. Financial services providers
  3. Loans to Central and State Governments, local Government bodies, Primary Agricultural Credit Societies (PACS) or Farmers' Service Societies (FSS)
  4. Loans granted by lenders to their own personnel or staff


Are Loans Taken from Banks Alone Eligible for Restructuring?

No, loans taken from non-bank entities are also included in the framework’s ambit. The institutions whose loans are eligible for resolution are:

  • All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
  • All Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Co-operative Banks
  • All All-India Financial Institutions
  • All Non-Banking Financial Companies (including HFCs)


How Would the Loan Restructuring Go About?

For Personal Loans

Lenders will be allowed a maximum of 90 days to implement the resolution plan. If they fail to do so, they will not get any benefit under the restructuring scheme and will have to declare the loan an NPA.

For Corporate Loans

Corporate restructuring may be done by converting a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower. Within 30 days of invocation of the restructuring facility, an Inter-Creditor Agreement (ICA) would have to be signed with the concerned corporate. The recast proposal would have to be approved by lenders representing at least 75% of the loan value and by 60% of the lenders in number to be invoked.

Once a borrower avails this scheme, the RBI has prescribed a clear monitoring period till the day the borrower repays at least 10% of residual debt.


RBI's Turnaround

Now, a one-time recast of troubled accounts is not a new idea. It has been pitched several times to alleviate COVID-hit businesses. The Indian Banks Association had recommended this, as had the Finance Ministry.

But the RBI was non-committal for a long time. Its hesitation probably stemmed from memories from 2008, when the Global Financial Crisis propelled it to announce a similar restructuring provision. This was misused by many corporate borrowers and banks.

How?: When borrowers could not repay loans, banks simply changed the loans’ terms to avoid them being tagged as bad loans. This allowed the bank to post higher profits and the borrower to continue borrowing from other banks. It was a win-win situation. But also a dangerous practice, one that former RBI Governor Raghuram Rajan branded as “deceptive accounting”.

The rules were tightened in 2015, requiring banks to set aside higher provisions for rotten assets. But the possibility of misuse remains, which is why ensuring that the new restructuring facility is availed by genuinely stressed accounts is indispensable.


The Big Question

So will the loan restructuring facility succeed in providing major relief to borrowers and offset the major business disruptions inflicted by the pandemic?

It’s hard to say. On one hand, it is a welcome move since borrowers struggling with decreased cash flow will now have more time to repay debts. And banks, which were facing a deluge of new bad loans - which would have seen their profits and liquidity take a drastic hit - will now be able to give borrowers more time to repay loans without having to categorise them as NPAs. Debt resolution is also good news for those accounts that were seeking an extension of the loan moratorium facility, which is now likely off the table.

At the same time, the various terms and conditions attached to the framework could be a dampener for businesses and individual borrowers. Those accounts with less than ₹25cr ($3.34m) in outstanding debt (so, smaller enterprises) and those who had defaulted due to COVID-related reasons before March 1st are ineligible, as are many other categories of borrowers.


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