Understanding Loan Restructuring Program

The Reserve Bank of India today said it would allow lenders to restructure loans of borrowers who are struggling to repay because of the fallout of the COVID pandemic.

So basically RBI says that,

When your finances are stretched thin, you may have to start picking which bills to pay. Missing a payment can lead to late payment fees, which can hurt your credit and cause Banks to seize any collateral used to back the debt. But if you reach out to your Banks, they may offer debt relief options.

A temporary hardship program could let you skip several payments or avoid certain fees. But during a serious setback, or if you’re already months behind on bills, Banks may make an unusual offer to restructure your loan agreement by reducing the interest rates on loans or by extending the payment terms

Here’s what it entails for the borrowers

A loan restructuring scheme will help borrowers to delay repayment of interest and principal amount, or repay loans at easy terms and conditions. These measures can help address their immediate revenue losses.

The intent of the scheme is to help those borrowers who were on track to repay loans but are unable to because of the adverse impact of the Covid-19 lockdown on their businesses.

Well, not everyone can rush for restructuring, the scheme is applicable for all personal and corporate loans that came under stress due to COVID-19, with certain conditions. But financial services providers, MSME borrowers who have total loans outstanding of less than Rs 25 crores and Loan should not be overdue by more than 30 days as on March 20.

The move to announce a one-time restructuring of loans was needed to support the firms adversely impacted by the Covid-19 pandemic. 

According to the RBI’s Financial Stability Report, the banks’ NPAs, which, until now, were showing a declining trend, are estimated to rise to 12.5 per cent by March 2021. If the economic environment worsens further, the NPAs are estimated to rise to 14.7 per cent. Isn’t this massive?

The latest round of RBI’s consumer confidence survey indicates that most respondents do not expect to increase non-essential spending in the coming year as well. This shows that the recovery prospects of these sectors are bleak in the next few months and it will directly hurt banks as a lot of companies will not be in the position to pay back loans and Interest

Well, Unless demand picks up, their ability to repay loans would remain impaired. A loan recast scheme would not be enough for them and the government now needs to prepare a plan on how to address the issue of their loans and defaults in the coming months

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