RBI ALLOWS A ONE-TIME RESTRUCTURING OF LOANS FOR THE STRESSED BORROWERS HIT BY COVID-19

RBI ALLOWS A ONE-TIME RESTRUCTURING OF LOANS FOR THE STRESSED BORROWERS HIT BY COVID-19

As the number of COVID-19 cases are increasing day by day all the steps taken by the higher authority will be appreciable.


The Reserve Bank of India (RBI) has allowed a one-time restructuring of loans in this ongoing pandemic caused by Covid-19 due to which individuals and the business entities are facing hard times to sustain.
 

On Thursday, 6th August 2020, RBI while announcing a review on monetary and credit policies stated that under the June 7, 2020, stressed asset resolution framework, a window will be provided that will help the lenders to implement a resolution plan, without changing the ownership.


In continuity, it was also announced that a provision for the restructuring of large corporate loans and personal advances, stressed MSME borrowers will also be permitted in order to restructure their debt on a condition that they were classified as standard as on 31st March 2020 and the window for the same will be available till 31st March 2021. 
 

Beneficiaries of the Loan Restructuring Scheme

It is the responsibility of the lenders to identify those borrowers who are facing stress on account of Covid-19 so that the benefit of this scheme can be availed by them. 
 


 

Eligibility Criteria-

  • Those companies and individuals are eligible for one-time restructuring whose loan accounts were in default which should not exceed 30 days as on 01st March 2020.
     
  • In case of corporate borrowers, banks can invoke a resolution plan till December 31, 2020, and implement it till June 30, 2021. Till the date of invocation, such loan accounts should continue to be standard.
     
  • This restructuring plan is available to all sectors. 
     
  • Those Borrowers will become eligible for this loan restructuring whose repaying the loan on time and as of 1st March 2020, whose accounts were not in default for more than 30 days
     
  • The resolution plan can be invoked till December 31, 2020, for personal loans, and within 90 days the same will be implemented thereafter. The accounts which are not in default for more than 30 days as on 1st March 2020 will be classified as standard.
     

Implementation of the scheme

  1. Reserve Bank of India will form an expert committee which will be headed by the former Chairman of ICICI Bank, Mr. K V Kamath. The committee will consist of 5 members and will make the necessary recommendations on the financial parameters as and when required. 
     
  2. The committee will also recommend the sector-specific benchmark to be factored into each resolution plan for those borrowers who have an aggregate exposure of more than Rs 1,500 crores, at the time of invocation.
     
  3. The committee will also undertake a process validation of resolution plans for those accounts having above a specified threshold.  Within 30 days, the RBI will notify this as well as any modifications. 
     
  4. When the aggregate exposure or debt is more than Rs. 100 crores, the lending institutions are required to obtain an independent credit evaluation for the resolution plan from any recognized credit rating agency.
     

RBI will have the last say on the eligibility criteria and the parameters.
 

Highly affected sectors

As per the survey conducted by the RBI, it is found that the most severely affected sectors by the ongoing pandemic caused by Covid-19 are as follows:

  1. Tourism and Hospitality, 
  2. Construction and Real Estate,
  3. Aviation.
     

Bank’s Role 

The role of the bank will be as follows:

  1. Up to a great extent, the banks will be able to check the increase in Non-Performing Assets (NPAs).
     
  2. Bad loans of Rs. 9 lakh crores will remain in the system as the bank will not bring down the NPAs from the present levels
     
  3. Banks are required to maintain an additional 10% as provisions against post-resolution debt. The lenders who fail to sign the Inter-Creditor Agreement (ICA) within a period of 30 days of invocation of the plan are required to create a 20% provision.
     
  4. Those borrowers are likely to apply for the scheme that has gone for a moratorium. Individual resolution plans can be easily handled by the banks.
     

Restructuring Timeline & Process 

  • Any time before 31st December 2020, a One-time restructuring plan may be invoked and within 180 days of invocation, the same must be implemented. 
     
  • inter-creditor agreements are required to be signed by the Lending institutions before the restructuring.
     
  • The lending institutions will attract 20% provisions if they do not sign inter-creditor agreements within a timeframe of 30 days of invocation of the resolution plan.
     
  • If 60% of the lenders by number and 75% by value do not sign the ICA in case of multiple banking or consortium lending arrangements, then the invocation would be considered as lapsed. The one-time restructuring scheme will not be invoked for such cases again. 
     
  • Extension of more than 2 years can be allowed by the lending institutions for the residual tenor of the loan, with or without payment moratorium.
     
  • Loans that are converted into other instruments, then such debt instruments having similar terms to that of the loan, will be a part of the post-resolution debt. If converted to any other non-equity instrument then the value of that portion of the debt being written down to Re 1.
     
  • For multiple banking or consortium banking arrangement, all types of disbursements as made to the borrowers by the banks and payments made by the borrowers to banks are required to routed through an escrow account. Such an escrow account should be maintained with one of the lending institutions.
     

Classification of Assets and the provisions

After the implementation of the plan, the account will continue to retain standard assets as classified. Lenders are required to maintain an additional 10% provisions against post-resolution debt.
 

Post Implementation

  • A monitoring period has been prescribed by the RBI for those accounts which are restructured under this scheme. This period will start from the date of implementation till the point when the borrower pays back at least 10% of the residual debt. 
     
  • A review period of 30 days will get triggered when the borrower is in default with any of the lending institutions during the monitoring period. The account will be classified as NPA by all the lenders involved in case the default is not resolved within the given review period. 
     
  • In case the borrower pays back at least 20% of the residual debt, then the lenders can write back half of the provisions held against restructured accounts.
     
  • The remaining provisions can be written back when another 10% residual debt is repaid and the same will help the account from becoming an NPA. 
     

Disclosures 

  • On a quarterly basis starting from 31st March 2021, the Banks are required to publish disclosures with respect to the number of accounts opted for a one time-restructuring plan and the outstanding loans to such accounts. 
     
  • On a half-yearly basis that will start from 30th September 2021, the Banks are also required to disclose the quantum of loans classified as standard after the restructuring plan, but later on, became NPA during the monitoring period
     
  • RBI on its website has prescribed disclosure format for the banks.
     

Conclusion

As the number of COVID_-19 cases are increasing day by day all the steps taken by the higher authority will be appreciable. Such Restructuring schemes will not only help them to survive in this pandemic time but will also motivate them to look for a brighter side and which will help them to come out from the current situation.
 

Edited by Minu Mishra

Want to get your business journey featured on CLIQTAX ? Send an email to us at editor@cliqtax.com