The Reserve Bank of India (RBI) has given the green signal to a loan restructuring scheme for stressed borrowers. A special window providing one-time loan restructuring to companies and individuals, which will provide relief specifically to those impacted by the COVID-19 pandemic.
Only those companies and individuals whose loan accounts are in default for not more than 30 days as on March 1, 2020, are eligible for one-time restructuring.
For corporate borrowers, banks can invoke a resolution plan until December 31, 2020, and implement it until June 30, 2021.
Such loan accounts should continue to be standard until the date of invocation. The one-time restructuring window is available across sectors.
It is expected to provide relief to companies that were servicing loan obligations on time but could have found it difficult after March, as the pandemic affected their revenues.
Companies that were already in default for more than 30 days as on March 1, however, cannot avail of this facility.
For personal loans, the resolution plan can be invoked till December 31, 2020, and will be implemented within 90 days thereafter. This too is for accounts classified as standard, but not in default for more than 30 days as on March 1.
The RBI has set up a five-member expert committee headed by K V Kamath, former Chairman of ICICI Bank, which will make recommendations on the financial parameters required.
According to the RBI’s systemic risk survey, the three sectors most adversely affected by the pandemic are tourism and hospitality, construction and real estate, and aviation.
The biggest impact will be that banks will be able to check the rise in non-performing assets (NPAs) to a great extent.
The RBI has built-in safeguards in the resolution framework to ensure it does not lead to the ever-greening of bad loans as in the past.
The RBI has said that the term of loans under resolution cannot be extended by more than two years. In the case of multiple lenders to a single borrower, banks need to sign an ICA.
The earlier restructuring schemes did not have any entry barrier, unlike the current scheme that is available only for companies facing COVID-related stress, as identified by the cut-off date of March 1.
Strict timelines for the invocation of resolution plan and its implementation have been defined in the scheme, unlike in the past when this was largely open-ended.
The structuring of the scheme makes the signing of the ICA largely mandatory for all lenders once the resolution plans have been majority-voted for, otherwise, they face twice the amount of provisioning required.
Independent external evaluation, process validation, and specific post-resolution monitoring are further safeguards.
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