RBI’s New Loan Recast Scheme
- On 6th August, 2020, the Reserve Bankof India(RBI) gave the green signal to a loan restructuring scheme for stressed borrowers.
- The so called ‘Resolution Framework for Covid19-related Stress’, has been announced as a special window under the Prudential Framework on Resolution of Stressed Assets issued on June 7, 2019.
- 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.
- For personal loans, the resolution plan can be invoked till December 31, 2020 and will be implemented within 90 days thereafter.
- 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.
How it is Differentfrom Previous Recast Schemes
- Entry Barriers: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, 2020.
- Defined Timeline:Strict timelines for invocation of resolution plan and its implementation have been defined in the scheme, unlike in the past when this was largely open-ended.
- ICA Signing Mandatory:The structuring of the scheme makes signing of theInter-Creditor Agreements (ICA) largely mandatory for all lenders once the resolution plans has been majority-voted for, otherwise they face twice the amount of provisioning required.
- Independent Validation:Loans above Rs 100 crore will require only one credit agency’s validation.Large loans above Rs 1,500 crore will also require to be vetted by Kamath committee.
- Penalties for Delays: Earlier schemes had no disincentives for lenders delaying an agreement for restructuring. The present scheme provides a for a 20% penal provision for lenders not signing the ICA.
- Post-Monitoring Performance: In this scheme a default with any of the lenders will automatically lead to a 30-day review period. Loans will be classified as NPAs if 10% repayment is not done during this period.
- Key sectors, such as micro, small and medium enterprises (MSMEs), hospitality, aviation, retail, real estate and auto, which are facing liquidity crunch, will benefit from the move.
- This restructuring plan will also enable lenders to implement a resolution plan in respect of eligible corporate debtors without a change in ownership, while classifying such exposures as standard, if they meet certain conditions.
- The central bank’s move will also incentivise banks to lend more to corporates through bonds, something that had stalled in the wake of covid-19.
- The biggest impact will be that banks will be able to check the rise in non-performing assets (NPAs) to a great extent.
- However, it will not bring down the NPAs from the present levels; legacy bad loans of close to Rs 9 lakh crore will remain within the system.
- Banks will have to maintain additional 10% provisions against post-resolution debt, and lenders that do not sign the ICA within 30 days of invocation of the plan will have to create a 20% provision.
Misuse of Earlier Restructuring Scheme by Banks and Corporates
Corporate Debt Restructuring (CDR)
Strategic Debt Restructuring (SDR)
Sustainable Structuring of Stressed Assets (S4A) Scheme
Asset Reconstruction Scheme(ARC)
Provisions against Misuse
- The RBI has built in safeguards in the resolution framework to ensure it does not lead to ever-greening of bad loans as in the past.
- Restructuring of large exposures will require independent credit evaluation done by rating agencies and a process validation by the Kamath-led expert committee.
- Unlike in the case of restructuring of larger corporate exposures, for personal loans there will be no requirement for third party validation by the expert committee, or by credit rating agencies.
- The RBI has said that the term of loans under resolution cannot be extended by more than two years.
- To mitigate the impact of expected loan losses, banks need to make a 10% provision against such accounts under resolution.
KV Kamath Committee