One-Time Loan Restructuring: Survival of the Last Resort for Number of Sectors
One-Time Loan Restructuring: Survival of the Last Resort for Number of Sectors
‘One-time restructuring of Corporate and Personal Loans allowed by RBI - Light at the end of the tunnel.’
‘COVID-19 has had a deep impact across the Indian economy; with some sectors hit very badly and businesses are on the verge of extinction. With the RBI moratorium coming to an end, a one-time restructuring of loans for the worst hit sectors and individuals is the way forward.’
The Indian economy has been hit very badly from COVID-19. With India being in one of the most stringent lockdowns in the world, owing to its large population and weak social infrastructure, the lockdown was much needed to build-up the infrastructure to beat the pandemic and prevent the spread. Inspite of the precautions and lockdown, the cases in India are rising and the COVID-19 curve is not bending down. There has been a lot of debate that the severe lockdown has had little benefit and has impacted the economy beyond repair.
The Indian economy was in a bad shape before COVID-19 as well and the GDP growth rate had touched a low of 4% and one of the reasons was the low credit off-take. The credit off-take from banks was low and post the IL&FS crisis in September 2018, the NBFC sector which was acting as shadow banks had taken a big hit. The Government of India has announced some very big structural reforms and given significant fiscal benefits as well. One of the most important steps taken by the RBI was to give a repayment holiday/ moratorium for all loans till 31st August 2020. This has helped many companies and individuals survive the turbulent period. However, there is considerable uncertainty in the economy still and the bankers are of the view that the worst hit sectors still need additional support. With the economy slowly opening up, the companies in these sectors are also in need to open up slowly and just a repayment holiday may not serve the purpose. The RBI has come up with the right way forward and has given a special window for one-time restructuring of loans.
The scheme may be the need of the hour for the borrowers in that sector and individuals who are working in the worst hit sector but banks also will need to provide for additional capital as provisioning for this exercise. Additional 10% provisions against post-resolution debt and lenders that do not sign the Inter-Creditor Agreement (ICA) within 30 days of invocation of the plan will have to create a 20% provision. The scheme will not provide for any relief for the INR 9 lakh crores of NPA that the banking system is already flogged with but will act as a good safeguard for the financial system so that incremental NPAs are not added.
Only those companies and individuals whose loans accounts are in default for not more than 30 days as on 1st March 2020 are eligible for one-time restructuring. For corporate borrowers, banks can invoke a resolution plan till 31st December 2020 and implement it till 30th June 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 2020, as the pandemic affected their revenues. Companies that were already in default for more than 30 days as on 1st March 2020, 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.
For personal loans, the resolution plan can be invoked till 31st December 2020 and will be implemented within 90 days thereafter. This too is for accounts classified as standard, but not in default for more than 30 days as on 1st March 2020.
For the personal loan borrowers, it must be understood that loans taken as gold loan, home loan, car loan, personal loan, education loan, loan against securities and consumer durable loan are categorised under the broad spectrum of ‘personal loans’ which would be covered under the one-time special restructuring scheme.
As per RBI recognition of loan accounts, by classifying such assets as Special Mention Accounts (SMA), before it becomes an NPA. SMA has been categorised as SMA-0, SMA-1 and SMA-2 accounts based on the period of overdue amount. SMA-0 are those accounts in which loan repayments are wholly or partly overdue for a period of upto 30 days, SMA-1 for period between 31 and 60 days, and SMA-2 for 61-90 days.
With the moratorium coming to an end on 31st August 2020, banks have a fear that large number of loans will become NPA as there are a number of sectors like retail, hospitality, entertainment, real estate. These sectors will need further assistance and one-time restructuring of loans would be the right way forward. The special window to recast loans under this scheme will prevent banks from reaching a NPA level of 11.5% at the gross NPA levels.
As per RBI Prudential Framework on Resolution of Stressed Assets, provides a principle-based resolution framework for addressing borrower defaults. Any resolution plan implemented under the Prudential Framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions.
In essence, a one-time loan restructuring scheme will allow banks to give more time for borrowers to pay back money, reduce interest rate, even take a haircut or a combination of all these depending upon the nature of the cases. The restructuring will be as per the requirements of the specific borrower keeping in mind the sector the company belongs to, how badly has it been hit, when will normalcy prevail for the sector and near term outlook for the company and sector. These are some of the fundamental factors that the bank will look at when reconstructing the loan.
In the past there have been a number of schemes introduced by RBI to help revive genuine companies which have fallen into trouble due to adverse economic conditions or a sector specific issue. Schemes like CDR, SDR, S4A, 5/25 have met with limited success at large. However due to impact on the economy, a one-time restructuring will help many companies, create employment and help the economy get back on track in the next 12 months.
With the markets running-up in the last few weeks, in these turbulent times investors should be cautious on the banking and financial sector. The special scheme will result in more provisioning by the banks thereby having an impact on overall profitability. Hence an investment into banking stock should be taken cautiously as the impact of the loan moratorium is not very clear yet and quality of the book will only be seen after 31st August 2020. For companies that are looking at restructuring of loan, it is an apt opportunity to access the impact correctly and work with the bankers to make the business sustainable and robust in these extremely turbulent economic conditions.
_Farzan Ghadially.