RBI allows One-Time Restructuring of Loans, Know How Borrower and Business will Benefit

Introduction

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. The lockdown though necessary has led to a disastrous impact on the economy.

The Government of India announced a variety of measures to tackle the situation, from food security and extra funds for healthcare and for the states, to sector related incentives and tax deadline extensions. The RBI too had announced various measures to the curb the economic impact of the pandemic.

Now, the Reserve Bank of India has decided to permit a one-time restructuring of loans. Announcing a review on monetary and credit policies on Thursday 6 August 2020, RBI Governor stated a window under the ‘June 7 stressed asset resolution framework’ will be provided which will enable lenders to implement a resolution plan, without a change in ownership.

In addition to the provision for restructuring of large corporate loans and personal advances, stressed MSME borrowers will also be allowed to restructure their debt provided they were classified as standard on March 31, 2020. This window will be available till March 2021.

What do you mean by loan restructuring?

Debt restructuring is a process used by companies to avoid the risk of default on existing debt or lower available interest rates. Individuals on the brink of insolvency also restructure their debt as though countries that are heading for default on sovereign debt.

The debt restructuring process is typically involves reducing the interest rates on loans, extending the dates when the company’s liabilities are due to be paid, or both. These steps improve the firm’s chances of paying back the obligations. Creditors understand that they would receive even less should the company be forced into bankruptcy and/or liquidation.

Debt restructuring can be a win-win for both entities because the business avoids bankruptcy, and the lenders typically receive more than what they would through a bankruptcy proceeding.

A committee to be set up for making recommendations to the RBI

A committee will be set up to make recommendations to the RBI on the required financial parameters, along with the sector specific benchmarks to be factored into each resolution plans. This committee will also validate the resolution plans for accounts with cumulative debt of Rs 1,500 crore and above.

The committee shall check and verify that all the processes have been followed by the parties concerned as desired without interfering with the commercial judgments exercised by the lenders. For instance where the aggregate debt is over Rs 100 crore, the lending institutions will have to obtain an independent credit evaluation for the resolution plan from a recognised credit rating agency.

Who is eligible to be covered under the one-time restructuring benefit?

1. Accounts which were in default for not more than 30 days as of March 1 will be eligible for such restructuring. All other stressed accounts will have to follow June 2019 framework for resolution. The one-time restructuring scheme shall also be applicable for personal loans.
2. Lenders will not be allowed to restructure loans they have granted to their own personnel or staff, under this framework.
3. The invocation of the resolution plan can be done at any time before December 31, 2020 and will have to be implemented within 90 days of such an invocation.
4. Lending institutions may allow rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of 2 years
5. The RBI also permitted a one-time restructuring scheme for micro, small and medium enterprise accounts.
6. Such a scheme would only be applicable to MSMEs with outstanding debt worth up to Rs 25 crore.
7. Restructuring plans for such MSMEs will have to be implemented before March 31, 2021.
8. For accounts which are restructured under these guidelines, banks will have to set aside additional provisions worth 5%, over and above what they already hold.

When can the plan be invoked?

One-time restructuring plan may be invoked any time before 31^st December, 2020 and must be implemented within 180 days of invocation.

Basic Features of the loan restructuring  scheme

1. Lending institutions may allow for extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
2. In cases where a loan is converted into other instruments, such debt instruments with terms similar to the loan, shall be counted as part of the post-resolution debt.
3. Conversion to any other non-equity instrument will lead to the value of that portion of debt being written down to Re 1.
4. In cases where there are multiple banking or consortium banking arrangement, all disbursements made to the borrowers by the banks and payments made by the borrowers to banks shall be routed through an escrow account maintained with one of the lending institutions.

Lenders to Sign Inter-Creditor Agreement (ICA)

1. Lending institutions are required to sign an ICA ahead of the restructuring. Lenders who do not sign inter-creditor agreements within 30 days of invocation of resolution plan shall attract 20% provisions.
2. In a multiple banking or consortium lending arrangement, if 60% of the lenders by number and 75% by value do not sign the ICA, then the invocation would be considered as lapsed.
3. The one- time restructuring scheme can then not be invoked for such cases again.

What is the loan asset to be classified in accordance with RBI guidelines?

The account will continue to retain standard asset classification after implementation of the plan. Lenders shall have to keep additional 10% provisions against post resolution debt.

Has RBI mentioned any monitoring requirements of the restructured account?

1. The RBI has prescribed a clear monitoring period for accounts which are restructured under this scheme.
2. This period begins from the date of implementation till the point in time when the borrower pays back at least 10% of the residual debt.
3. In case a borrower is in default with any of the lending institutions during the monitoring period, a review period of 30 days gets triggered.
4. If the default is not resolved within this review period, the account is classified as NPA by all lenders involved.
5. Lenders can write back half of the provisions held against restructured accounts after the borrower pays back at least 20% of the residual debt.
6. The remainder of the provisions can be written back after another 10% of the residual debt is repaid, without the account slipping into NPA.

1. Banks will be required to publish disclosures with respect to the number of accounts where a one time-restructuring plan is implemented and the outstanding loans to such accounts, on a quarterly basis starting March 31, 2021.
2. They will also be required to disclose the quantum of loans which were classified as standard after the restructuring plan, but later slipped to NPA during the monitoring period, on a half yearly basis starting September 30, 2021.
3. A disclosure format has been prescribed by the RBI.

Lenders must ensure that this restructuring scheme is only available to borrowers who are facing stress on account of Covid-19.

The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies and anybody corporate established by an act of parliament or state legislature.

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