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Daily News Analysis

RBI’s new loan recast scheme  

8th August, 2020 Economy

Context: Reserve Bank of India gave the 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.


Who will benefit from the scheme?

  • 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.
  • 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.
  • Industry sources said this could affect revival plans of companies that were about to regain profitability but got hit when the lockdown was imposed.


How will it be implemented?


  • 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 crores 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.


How will the scheme impact banks?

  • 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 crores will remain within the system.
  • Banks will have to maintain additional 10% provisions against post-resolution debt, and lenders that do not sign the Intercreditor Agreement (ICA) within 30 days of invocation of the plan will have to create a 20% provision.
  • While a section of borrowers who have gone for a moratorium is likely to apply for the scheme, banks will not face much of a problem in working out individual resolutions plans: they will have to tackle only borrowers who were in stress after the pandemic hit.


Does the new scheme have safeguards against misuse?

  • 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, or need for ICA.
  • The RBI has said that the term of loans under resolution cannot be extended by more than two years. In the case of multiple lenders to a single borrower, banks need to sign an ICA.
  • To mitigate the impact of expected loan losses, banks need to make a 10% provision against such accounts under resolution.