Loan Restructuring – Due to Covid-19 Impact

Ashish M. Shaji

27 Aug, 2020

The Reserve Bank of India announced, in its statement on developmental and regulatory policies, a scheme for one-time loan restructuring to help borrowers in managing the stress caused due to the Covid-19 pandemic. This restructuring of loans has been allowed for retail, corporate, and MSME loans.

An Overview on Loan Restructuring Framework

The Framework is aimed at helping those borrowers who were right on track to repay the borrowed loans but were unable because of the impact of the Covid-19 pandemic. A number of checks and balances have been brought in as they don’t want to see a repeat of previous instances of restructuring of loans where it didn’t succeed in addressing the NPA crisis.

It may be noted that the resolution under this framework will be applicable to only those borrower accounts that were classified as standard and that are not in default for more than 30 days as on 1^st March 2020. The RBI further stated that the plan may be invoked anytime by 31^st December 2020 and shall be implemented within 180 days from the date of invocation.

A list of disclosure requirements has been laid out for banks, and for big loans, an expert committee has been constituted to undertake process validation of restructuring of loans.

Loan Restructuring: Sufficing the Current need

The move to announce this one-time restructuring of loans has been hailed as a much needed move as it was needed to support the firms that were adversely impacted by the present pandemic. The Reserve Bank had earlier announced an across the board moratorium for six months from the month of March to August for borrowers.

However, banks were of the view that moratorium should not be extended, and they must be provided with greater flexibility to recast their loans where necessary.

The restructuring of loans intends to provide flexibility to banks, and it was needed considering the there is a risk of banks NPAs rising to alarming levels by the end of this year. It is expected as per the RBIs’ Financial Stability Report, the banks’ NPAs, which were showing a decline until now, are now estimated to rise to 12.5 percent by 2021.

As per a recent study, it is estimated that debt worth 3 lakh crore rupees is at risk of slipping into NPAs due to the adverse impact of Covid-19 if it’s not restructured by banks. 

Performance of Non-finance firms

The performance of non-financial listed firms shows a worrying picture. The sales of non-financial firms have been contracting since September 2019; the contraction had a spike of 37 per cent in the month of April to June. The after-tax profit of non-financial firms decelerated to 92 per cent in the month of April to June, showcasing how they were impacted by the Covid-19 induced lockdown.

There is a need to support these firms in times such as this because the place that they find themselves in is not because of owners’ or managers’ decisions but due to an uncontrollable pandemic. Steps such as guaranteed loans to MSMEs and one-time loan restructuring can ease the pain of both lenders as well as borrowers to some extent.

How will Loan restructuring benefit borrowers?

The scheme, i.e., Restructuring of loans, helps borrowers in a way that they can delay the repayment of interest and principal amount or repay the loans at easier terms. It will help them address their immediate revenue loss to some extent.

The restructuring of loan allows borrowers to:

• Reschedule loan payments;
• Reduce EMIs temporarily and increase it later;
• Extend the tenure of the loan;
• Convert interest accrued into a manageable small loan; and
• Moratorium on EMIs for a maximum of up to two years.

However, the tourism sector, hospitality, and the aviation sector are the sectors that have been adversely affected the most due to this pandemic. The prospects of these sectors rely on discretionary consumer spending.

As per the RBI’s consumer confidence survey, it indicates to the fact that most people do not expect to increase non-essential spending at least till the next year. This suggests that the chances of recovery of these sectors may require more time. Unless there is an increase in demand, their ability to repay loans would be less. They would need more than a loan recast scheme.

What will be the role of the expert committee constituted by the RBI for restructuring?

The expert committee headed by the veteran banker KV Kamath will advise the RBI^[1] on the loan recast scheme. The committee’s role would be to recommend the list of financial parameters to be considered for resolution plans. It will also vet large resolution plans under the scheme to check if all rules are followed.

How to apply for Loan Restructuring?

To apply for this, eligible borrowers can approach their lenders within the window before 31^st December 2020 to avail the restructuring benefits. The lenders shall evaluate their requests on case by case basis and decide the terms and conditions.

It may be noted that lenders are required to draw up the restructuring plan after receiving the request. If the lenders fail to comply with this, then they shall not be able to avail of the benefits of this scheme.

Conclusion

Read our article:How MSMEs benefited from RBI’s loan restructuring: An Insight Story