The Reserve Bank of India said it would allow lenders to restructure loans of borrowers who are struggling to repay because of the fallout of the COVID pandemic. (Source CNBC)
RBI Announcement on Loan Restructuring
RBI announced a one-time restructuring scheme for lenders, which will allow them to change repayment terms for their borrowers who have been hit by the COVID-19 lockdown. Lenders can now do this while keeping the borrower’s account standard, and will not have to tag them as defaulters/their account as a non-performing loan. Non-performing loans are those that remain unpaid for over 90 days. Lenders can now also restructure debt without changing the owners of a stressed company, which was the case under existing rules. However, these easier terms are only allowed for those borrowers who have been impacted by COVID19, and no others.
Last Date of Loan Restructuring
The last date for banks to invoke restructuring of eligible loans is December 31, 2020.
Allowed banks for Restructuring
RBI has allowed all public banks, private banks, foreign banks operating in India, small finance banks, Local Area Banks, regional rural banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks, NBFCs, housing finance companies, and all-India financial institutions to use this facility.
Are all loans eligible for restructuring?
The scheme is applicable for all personal and corporate loans that came under stress due to COVID-19, with certain conditions. But financial services providers, MSME borrowers who have total loans outstanding of less than Rs 25 crores, farm credit, loans to government bodies are not eligible. Any loans to Primary Agricultural Credit Societies (PACS) or Farmers’ Service Societies (FSS) for lending to agriculture would also not be eligible for this restructuring.
Eligibility Criteria ?
Only those borrowers who were making regular repayments for their loan, and were not overdue for more than 30 days as of March 1, 2020 are eligible to benefit from this scheme.
Personal Loan users Benefit under this scheme ?
Restructuring a borrower’s loan could entail changing terms of the loan via rescheduling of payments, conversion of any interest accrued (or to be accrued) into another small loan, or granting of a moratorium, subject to a maximum of two years.
An eligible personal loan borrower’s account will be maintained as “standard” or not in default in the lender’s books until the date that the borrower and lender agree to proceed with restructuring (date of invocation).
Lenders/banks will be allowed a maximum of 90 days to implement the resolution or restructuring plan. If they fail to implement the resolution plan in this time, then they will not get any benefit under the COVID restructuring scheme and will have to declare the loan non-performing assets, and set aside higher provisions.
Loan Restructuring vs Moratorium
A one-year window for loan restructuring will give borrowers who are struggling with their cash flows a breather.
The Covid-19 pandemic and the resultant economic fallout had prompted the central bank to announce a moratorium on repayments in March, which has been extended to last until 31 August. HDFC Ltd Chairman Parekh had last week pointed out that a blanket moratorium meant even those borrowers who could afford to pay were not repaying by taking advantage of the moratorium.
Instead, he had suggested loan restructuring, which would allow financial institutions to restructure accounts at their discretion, depending on the genuine need and problems faced by borrowers.