In times that are heavily cumbersome upon individual financial positions, such as the I’m going pandemic situation, the burden of loan repayment is an issue of concern. Since loan repayment becomes a problem in this situation due to external circumstances such as liquidity obstruction in the market, the impossibility of repayment as default is a bit too harsh and unreasonable. Thus, in order to provide individuals and businesses with a window for relaxed repayments, the Reserve Bank of India takes recourse to the policy of loan restructuring. This policy ensures that loan repayments are relaxed while at the same time, they are not classified as ‘Non-Performing Assets or NPAs.
As far as the on-going pandemic situation is concerned, the expert committee of the RBI based out of the Indian Banks’ Association (IBA) that has been constituted to restructure loans equal to or exceeding an amount of 1500 crores has given its own set of recommendations on the concerned subject.
Plans Proposed for Restructuring
The following avenues have emerged as possible windows for enabling the kind of loan restructuring that the RBI is trying to make:
- Adjustments to the schedule of loan payments
- Availing a different mode of credit facilitation for all interests charged or due to be accrued.
- Making allowance for a moratorium period of a maximum of 2 years’ duration based on the borrower’s income.
- Making changes to the set tenor of the loan
The proposed restructuring scheme will be contingent on various considerations, including debt serviceability, liquidity and leverage. The committee tasked with the onus of making restructuring proposals will consider all parameters coupled with the necessary range of adjustment pertaining to each sector and submit their recommendations accordingly to the RBI. The modifications to such proposals made thereafter will also be notified to the RBI within a period of 30 days. The assessment of the due procedure followed by each concerned party alongside the commercial interests and policies of the lender is also the onus of the committee.
Eligibility Criteria for Considering Loan Restructuring
The benchmark of 30 days has been standardized as the cut-off criteria for determining a loans eligibility for being considered for loan restructuring and readjustment. Thus, in accordance with the mandate issued, a borrower whose loan has been lying in a state of non-payment for less than a period of 30 days as on the 31st of March 2020 will be duly eligible for the relief measures put in place by the RBI on the recommendations of the loan restructuring committee.
Furthermore, the eligibility criteria have also been determined based on the type of lending institution and the nature of the borrower/ lender. These could be classified as follows:
Eligible for Readjustment
- Readjustment window can be availed by individuals who had opted to borrow from the non-banking financial companies (NBFC)
- Institutions eligible for loan restructuring include Commercial Banks (including Small Finance Banks, Regional Rural Banks, and Local Area Banks), Primary (Urban) Co-operative Banks, State Co-operatives and District Central Co-operative Banks.
- Financial institutions of an all-India character and non-banking financial institutions, including HFCs, are eligible for loan restructuring policy.
Not Eligible for Readjustment
The following entities are not eligible to avail the said policy of readjustment:
- MSME institutions who have a liability towards lending agencies to a time of 250 crores or less in aggregate.
- Loans advanced to Central and State governments, Local government bodies, PACS – Primary Agricultural Credit Societies or FSS – Farmers’ Service Societies.
- Lending agencies advance loans to their own employees and staff.
Various other streamlining parameters have been included with respect to the said policy of readjustment. These are based on the kinds and types of loans given. These could be outlined in detail in accordance with the kinds of loans. The details pertaining to such parameters are as follows:
- Personal Loans
All kinds of loans made to individuals in person are allows entry into this scheme of loan readjustment. However, the RBI has kept this window closed with respect to loans provided by lending institutions to their own personnel. Further, the RBI has mandated the inclusion exclusively of loans notwithstanding a duration of 30 days as on 31.03.2020 or more in this loan restructuring scheme. It has also asked the procedure of adjustment to take shape not later than 31st of December 2020 and has also asked for the completion of the process to take place within a period of 90 days.
- Corporate Loans
In terms of loans made to corporate entities, the RBI has mandated a clearance window of 180 days to smooth the policy of restructuring. Besides, an inter-creditor agreement (ICA) also needs to be signed and entered into within 30 days subsequent to the loan restructuring scheme’s commencement. MSME institutions have also been brought within the ambit of the policy of loan readjustment subject to the condition that the aggregate amount accrued to lending institutions do not exceed 25 crores.
- Debt Pertaining to MSMEs
The policy of loan readjustment with respect to the MSME loan sector had already been in vogue. It was by virtue of this scheme that the MSMEs who had been defaulted upto January 1, 2020, were categorized as ‘standard’ and a facility for Readjustment upto December 31st, 2020 had been provided to them. However, in the wake of the unprecedented pandemic situation, the MSME sector was found to be in desperate need of other relief measures and substantial financial assistance and stimulus.
In accordance with the RBI’s existing mandate, lending agencies ought to restructure MSME loans if the MSMEs concerned were registered as a standard defaulter as on 31st of March 2020. Further, all such procedures of restructuring are mandated to be completed by the 31st of March 2021.
The summary of such a loan restructuring policy with respect to the different sectors and cases can be shown in the form of a table as follows:
|Type of Loan||Eligibility Condition||Clearance window|
|Personal Loan||Less than 30 days duration of withhold as on 31.03.2020||90 days and within 31.12.2020|
|Corporate Loan||NA||180 days|
|MSME liability||Must be a ‘standard’ defaulted as on 31.03.2020||Within 31.12.2021|
While the pandemic has taken a major toll on nations’ financial health across the globe, the RBI has essayed to ease the burden of debt on borrowers for no substantial fault of their own during the pandemic. Thus, the Restructuring Scheme will be a major cause of alleviation of the anxieties of many individuals and ease the repayment of business loans. However, the streaming of individuals and entities eligible for the scheme is meticulously provided to avoid any redundancy of the endeavour. This also curbs the misuse of such relief packages by individuals and entities who are regular defaulters. However, such decisions come with the caveats that the ultimate decision of readjustment lies in the hands of the lending agency. If it does extend this facility, it must act according to RBI guidelines. Further, unlike a moratorium, readjustment might only end up affecting the institution’s credit score since the readjustment is being made on the original business loan.