RBI opens one-time window for companies, individuals to recast loans – Times of India

MUMBAI: For the first time since the 2008 financial crisis, the Reserve Bank of India on Thursday announced an across-the-board loan restructuring scheme that will extend to individuals, in addition to airlines, hotels and steel and cement companies hit by the pandemic.
The step is being viewed as the central bank’s effort to shoulder the burden of seeing the economy through the worst peacetime crisis in the last 100 years.
The loan restructuring scheme comes in the backdrop of the government putting the Insolvency and Bankruptcy Code in cold storage, at least for the time being. The Centre promulgated an ordinance to keep insolvency action in abeyance for at least six months after acknowledging that IBC was helping improve the payment culture.
Several businesses, such as hotels, airlines and even factories are either shut or are operating below capacity due to health restrictions and lower demand, resulting in widespread job losses. The potential long-term damage to businesses, which had a good track-record of paying loans, prompted RBI governor Shaktikanta Das to allow loan resolution to ensure that they retained their viability.
The regulator has mandated that banks set aside 10% of the restructured amount for possible loss in future, a move that will force the government to provide additional capital to state-run lenders that control two-thirds of the business. The details of the scheme will be worked out by an expert panel headed by veteran banker KV Kamath. The committee will provide a checklist to lenders to help them decide on restructuring and also vet large loans for viability.
Home loan borrowers who have availed of RBI’s repayment moratorium, which ends on August 31, will have to wait for their banks and housing finance companies to announce the details of the restructuring scheme.
According to lenders, the restructuring could be like a step-up feature where they pay a smaller EMI for initial years. RBI’s scheme also gives lenders the option to extend a moratorium. The only condition is that the term of the loan should not be extended by more than two years. Also, borrowers who have defaulted before the moratorium announced in March 2020 will not be eligible for restructuring. Restructuring is also not available to financial sector entities, central and state government as well as local bodies like municipalities.
“Restructuring a home loan is simpler than restructuring a business loan. For salaried, who have seen a reduction in income, there is a clear indication of the cash flow,” said Rajkiran Rai, MD & CEO, Union Bank. There are safeguards to ensure that banks keep an eye on such loans. They have to make an additional provision of 10% and also be prepared to classify them as non-performing assets even if they miss out on one EMI.
Until now, banks could not provide relief without classifying a borrower as a defaulter (non-performing asset) or changing the owner. Now banks can restructure loans for existing owners of businesses. Bankers made it clear that this restructuring is not a giveaway promoting indiscipline among borrowers. “This scheme does not benefit defaulters and penalise those who have been diligent. Only those who have been paying in time until the Covid lockdown will be eligible,” said Samuel Joseph Jebaraj, deputy MD, IDBI Bank. He said that while businesses that have borrowed beyond their means can also apply (if they have not defaulted) they may not pass the test of viability and not be eligible.
Under the new scheme, banks have to decide on extending the restructuring scheme by December 2020 and restructuring must be implemented by March 2021. In respect of the restructured loans, banks have to maintain 10% additional provisions. There is an indirect pressure on minority lenders in a consortium to fall in line and sign the restructuring agreement as those not participating in restructuring must make additional provision of 20%.
According to Das, the Covid-19 economic stress can potentially impact the long-term viability of a large number of firms, otherwise having a good track record under the existing promoters, due to their debt burden becoming disproportionate, relative to their cash flow generation. “Such widespread impact could impair the entire recovery process, posing significant financial stability risks. Considering the above, with the intent to facilitate a revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window to implement a resolution plan for corporate, without a change in ownership, and individual loans,” said Das.