RBI Permits One-Time Restructuring Of Loans

The Reserve Bank of India has decided to permit a one-time restructuring of loans, amid the ongoing Covid crisis which is hitting businesses hard.

Announcing a review on monetary and credit policies on Thursday, RBI Governor Shaktikanta Das said a window under the June 7 stressed asset resolution framework will be provided which will enable lenders to implement a resolution plan, without a change in ownership.

“...it has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures - without change in ownership - as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions,” RBI Governor Shaktikanta Das said in his statement on Thursday.

In addition to the provision for restructuring of large corporate loans, stressed MSME borrowers will also be allowed to restructure their debt provided they were classified as standard on March 31, 2020. This window will be available till March 2021.

What Restructuring 2.0 Will Look Like?

According to the RBI, lenders must ensure that this restructuring scheme is only available to borrowers which are facing stress on account of Covid-19. Lenders will be required to assess the viability of any resolution plan proposed. Towards this end, each lending institution shall put in place a Board approved policy detailing the manner in which such evaluation may be done and the objective criteria that may be applied while considering the resolution plan in each case.

The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies and any body corporate established by an act of parliament or state legislature.

The framework for the one-time restructuring plan for corporate accounts is as follows

• Accounts which were in default for not more than 30 days as of March 1 will be eligible for such restructuring. All other stressed accounts will have to follow June 2019 framework for resolution.
• One-time restructuring plan maybe invoked any time before December 31, 2020 and must be implemented within 180 days of invocation.
• Lending institutions which do not sign inter-creditor agreements within 30 days of invocation of resolution plan shall attract 20% provisions.
• Lenders shall have to keep additional 10% provisions against post resolution debt.
• Account will continue to retain standard asset classification after implementation of the plan.
• Lending institutions may allow for extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
• In cases where a loan is converted into other instruments, such debt instruments with terms similar to the loan, shall be counted as part of the post-resolution debt.
• In cases where there are multiple banking or consortium banking arrangement, all disbursements made to the borrowers by the banks and payments made by the borrowers to banks shall be routed through an escrow account maintained with one of the lending institutions.

A committee headed by KV Kamath will be set up make recommendations to the RBI on the required financial parameters, along with the sector specific benchmarks to be factored into each resolution plans, the RBI said.

Restructuring Of Loans

The Indian banking system’s experience with restructuring of loans, without adequate provision and a downgrade in classification to the category of non-performing loans, has been discouraging.

Such restructuring was permitted in the years after 2008 and continued till 2015. The result was a build-up of stressed assets, which eventually led to an asset quality review. Since then, banks have been struggling to resolve that pool of bad loans and non-performing assets remain elevated.

Stress tests conducted by the RBI show that under the baseline scenario, where growth is assumed at -4.4%, the gross NPA ratio may rise to 12.5%. In a severe stress scenario of a 8.9% contraction in the economy, the gross NPA ratio may rise to 14.7%.

Permitting restructuring may keep reported bad loans in check. However, analysts have cautioned that a high share of restructuring will be seen as credit negative.

“While loan restructuring could postpone the recognition of stress in the lender book in the near-term, high share of such assets would be a credit negative. Also, the efficacy of this restructuring would be crucial as lenders would be faced with many requests coming from the smaller ticket size borrowers (in the retail and MSME space) vis a vis the large borrower restructuring done by them in the past,” rating agency ICRA said ahead of the announcement.