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A quick guide on recast and resolution of loans

22 August, 2020

In a bid to help a large section of the population affected by the financial crisis created as a result of the pandemic, the Reserve Bank of India announced a loan structuring scheme in August this year. The decision was taken in the wake of an ordinance by the centre, which was promulgated with a view to keep insolvency at bay for at least six months. The Resolution Framework for Covid-19 related stress, as it has come to be known, was formed as a special window under the guidelines given for loan restructuring and allows banks to give borrowers more time to pay back without classifying a loan as an NPA. According to the scheme, the RBI allowed a one-time restructuring of both corporate and retail loans. It was also decided that an expert panel headed by KV Kamath would be given the task of working on the details of the scheme and is expected to submit its report in the first week of September.

In the past too, the decision to restructure loans was not unheard of and during the 2008 financial crisis, the RBI had allowed a one-time loan restructuring scheme for India Inc. During that time, the regulatory authority had qualified for the restoration of standard asset classification to accounts that had turned NPAs during the restructuring approval process, provided that the restructuring package was implemented within 90 days from the date of receipt of an application by the bank taking it up. The two conditions imposed were that the restructuring could not be repeated and that the dues to the bank were fully secured.

In 2020, a similar urgent need for loan restructuring came to fore in light of the disruption following the pandemic. Moreover, future estimates by the central bank about the country's GDP being in the negative territory for FY21 and similar other projections like the International Monetary Fund projections about India's GDP contracting by 4.5 per cent this financial year also led to the recast guidelines.

Moreover, under the resolution plan offered by a bank to an individual borrower, may include a rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of a moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years. Furthermore, the overall tenor of the loan may also be modified in proportion. Also, according to the guidelines, banks can offer this option for all personal loans, which mean loans given to individuals and consist of consumer credit, education loan, loans given for creation/ enhancement of immovable assets and for investment in financial assets like shares, debentures, etc. As far as the question of eligibility of borrowers is concerned, the guidelines state that those individual borrower accounts which were classified as standard, but not in default for more than 30 days with the lending institution as on March 1, 2020, would be eligible for resolution under the framework.

To prevent the misuse of the scheme, this time RBI has called for more stringent safeguards. Restructuring of huge exposures will require assessment by credit rating agencies and process validation by the Kamath-led expert committee. And in the case of multiple lenders to a single borrower, banks will have to sign ICA. However, as far as the personal loans are concerned, the borrower doesn't require validation from credit rating agencies or the expert committee. There is also no need for ICA for personal loans.

The term of loans under resolution will not be extended by more than two years as per RBI guidelines.

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