The Reserve Bank of India (RBI) on Thursday permitted a one-time loan restructuring of stressed accounts, conceding a longstanding demand of lenders and the industry. Banks will get a special window to recast stressed retail and corporate loans without classifying them as non-performing, provided they set aside 10% provisions on such loans.
Industry estimates peg the total quantum of loans coming up for recast at ₹5-8 trillion, or 5-8% of the ₹101 trillion loan book.
“A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities," RBI governor Shaktikanta Das said.
The central bank set up an expert committee under the chairmanship of veteran banker K.V. Kamath to make recommendations to RBI on the required financial parameters, along with the sector-specific benchmarks for the special window. RBI specified that the resolution plan may be invoked anytime till 31 December 2020 and will have to be implemented within 180 days from the date of invocation. For retail loans, the deadline has been set at 90 days.
Lenders are allowed to extend the tenure of the loan by up to two years, apart from sanctioning additional loans and a repayment moratorium to tide over the crisis. RBI has also extended the deadline for a one-time recast of small business loans by three months to 31 March 2021, provided they were standard as on 1 March.
Significantly, while much of the focus around debt recast in the past has been on the corporate segment, delinquencies within the retail borrower ecosystem this time are expected to rise manifold post the end of blanket moratorium.
According to the RBI’s Financial Stability Report in July, 56.2% of retail loans were under moratorium as on 30 April, against only 39.1% of corporate loans. Personal loans refer to loans given to individuals and comprise consumer credit, education loan, loans for creation or enhancement of immovable assets like housing, and for investment in financial assets like shares.
To avail of the window, RBI said corporate loan accounts should have been standard and not in default for more than 30 days as on 1 March. It added that the accounts should continue to remain standard till the date of invocation or the date on which both the borrower and lenders agree to proceed with a resolution plan.
While banks could recast loans even before Thursday’s step, lenders were reluctant to use it as they had to tag the loan as bad and set aside 15% as provisions. This has been the norm since a regulatory forbearance was withdrawn in April 2015. Now, RBI has allowed banks to recast debt without classifying them as NPA, thereby saving banks on excess provisions.
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