The Reserve Bank of India (RBI) has proposed a one-time restructuring of loans for borrowers struggling with repayments due to lack of liquidity. The plan is to restructure these loans without classifying them as Nonperforming assets (NPAs). Loan restructuring will help companies and individuals cope up with the financial stress caused by the pandemic situation. The central bank has also planned to form an expert committee to suggest ways for the restructuring of loans of Rs 1,500 crore and above. The expert committee would be based out of the Indian Banks’ Association (IBA), and RBI shall bear all the expenses.
Loan Restructuring Plans Proposed
The resolution plans for the restructuring of loan are as follows:
- Rescheduling of loan repayments
- Conversion of any interest charged, or to be accrued, into another credit facility
- Allowing a maximum of 2 years moratorium based on the income of the borrower
- The set tenor of the loan may also get altered
The restructuring parameters will cover aspects related to leverage, liquidity, debt serviceability etc. The special committee set for the restructuring of loans will submit a list of financial parameters and the sector-specific desirable ranges for such restructuring parameters to RBI, which, in turn, will be notified for the same, along with other modifications, if any, within 30 days. The committee will also be responsible for checking and verifying that all the processes have been followed by the parties concerned without interfering with the commercial judgments exercised by the lending institutions.
Loan Restructuring Eligibility
Loan borrower whose accounts are not in default for more than 30 days with their respective lending institution as on March 1st, 2020 are eligible for loan restructuring.
Eligible for Restructuring of Loans
- Individuals who have applied for loans with non-banking organisations (NBFCs) will be eligible for resolution.
- Organisations like 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) are all eligible for the restructuring of loans.
Those Who are Not Eligible for Loan Restructuring
- MSME borrowers whose aggregate exposure to lending institutions collectively is up to 25cr or less
- Loans are given to the Central and State Governments, local Government bodies, Primary Agricultural Credit Societies (PACS) or Farmers’ Service Societies (FSS)
- Loans offered by lenders to their personnel or employees
Personal loans are included in the restructuring except for the loans offered to staff working for the lending institutions. The RBI also stated that standard loan accounts that were not in default for more than 30 as on March 1, 2020, will be considered for restructuring and the process will be invoked not later than December 31, 2020, and must be implemented within 90 days from the date of invocation.
The restructuring for business loans has to be implemented within 180 days from the date of invocation. All lending institutions will be required to sign an intercreditor agreement (ICA) within 30 days from the date of invocation of loan restructuring. Loans to MSMEs will also be restructured, up to an aggregate of Rs 25 crore per borrower.
The restructuring of MSMEs (Micro Small Business Enterprises) debt has been already provided. The ones in default as on January 1, 2020, would be considered as ‘standard’ and subjected to loan restructuring being implemented up to December 31, 2020. The MSME scheme has provided relief to a large number of businesses in the MSME sector. However, the economic fallout because of the pandemic, the MSMEs will require substantial financial support at the moment.
Lending institutions need to restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. Further, this restructuring of loans shall be implemented by March 31, 2021.
RBI aims to maintain the financial health of the economy during the pandemic. However, the implementation of the Resolution Framework during this time will aid borrowers struggling with decreased cash liquidity by providing them more time for the repayment of the debts. Loan restructuring can be a good idea if you are unable to make repayments towards your debts. It may depend, in part, on your overall financial situation and the types of loan restructuring your lender has to offer. While RBI gave a framework, it’s up to the lender’s discretion the relief that they want to provide to their borrowers. Restructuring is unlike a moratorium, which any borrower could avail, it may harm your credit score because you are defaulting on the original loan agreement by agreeing to loan restructuring.
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