RBI’s Loan Recast Scheme
In its monetary policy review the Reserve Bank of India (RBI) gave green signal to a loan restructuring scheme for stressed borrowers. A special window providing one-time loan restructuring to companies and individuals, it will provide relief specifically to those impacted by the COVID-19 pandemic.
Feature of Scheme
• The intent of the scheme is to help those borrowers who were on track to repay loans but are unable to because of the adverse impact of the Covid-19 lockdown on their businesses.
• A number of checks and balances have been introduced to prevent a repeat of the previous episodes of loan restructuring, which did not succeed in addressing the NPA crisis but instead led to a widespread strategy of ‘extend and pretend’, where banks kept on extending fresh loans to ailing companies, even as they struggled to repay old debts.
• Only those companies and individuals whose loans 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 till December 31, 2020 and implement it till June 30, 2021.
• Such loan accounts should continue to be standard till the date of invocation. The one-time restructuring window is available across sectors.
Comparison to previous schemes
Unlike the previous scheme, the current scheme has an entry barrier as itis available only for companies facing COVID-related stress, as identified by the cut-off date of March 1.
Strict timelines for invocation of the 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.
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.
While the RBI has given the broad contours, the panel will recommend the sector-specific benchmark ranges for such parameters to be factored into each resolution plan for borrowers with an aggregate exposure of Rs 1,500 crore or above at the time of invocation.
The committee will also undertake a process validation of resolution plans for accounts above a specified threshold. The RBI will notify this along with modifications in 30 days.
The RBI will have the last word on who will be eligible and the parameters.
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 this facility.
This could affect revival plans of companies that were about to regain profitability but got hit when the lockdown was imposed.
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 banks will be able to check the rise in (NPAs) to a great extent.
Banks will have to maintain additional 10% provisions against post-resolution debt, and lenders that do not sign the Inter creditor Agreement (ICA) within 30 days of invocation of the plan will have to create a 20% provision.