Thursday, August 20, 2020

RBI ALLOWS ONE TIME RESTRUCTURING OF LOANS - Resolution Framework for COVID-19-related Stress

RBI has in its Monetary Policy and Statement on Developmental and Regulatory Policies focused on the Measures Aimed at Mitigating the Economic Fallout of COVID-19.

In order to help out borrowers dealing with liquidity issues, the Reserve Bank of India (RBI) recently proposed restructuring of personal loans for those struggling with repayments in its Statement on Developmental and Regulatory Policies.

In the review on monetary and credit policies RBI Governor Shaktikanta Das said a window under the June 7,2019 “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019 be provided which will enable lenders to implement a resolution plan, without a change in ownership. 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.

“...it has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures - without change in ownership - as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions,” RBI Governor Shaktikanta Das said in his statement on Thursday the 6th August 2020. The regulatory approach has to be “dynamic, proactive and balanced”, Das said. The RBI will ensure that necessary safeguards are in place to maintain financial stability, he added.

A restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place. The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support. Accordingly, it has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.

What is Restructuring Plan  

New loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower installment amount. Loans are commonly rescheduled to accommodate a borrower in financial difficulty and, thus, to avoid a default. Also called rescheduled loan.

Under the restructuring plan, banks can now choose to reschedule loan repayments, convert any interest accrued or to be accrued into another credit facility, extend the loan tenor, or even extend moratorium up to two years for the existing loans, depending on the current repayment ability of the eligible borrower.

According to the RBI, lenders must ensure that this New restructuring scheme is only available to borrowers which 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 any body corporate established by an act of parliament or state legislature.

RBI said that borrowers who had been repaying regularly till March 2020 can now have a restructuring of their loan through a framework which will be decided by the bank. As per RBI, the framework for this is required to be fixed by December 31 and implemented within 90 days from then. Loans in default for more than 30 days as on March 1, 2020, will not qualify for this plan.

Eligibility Criteria

·         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.

·         A committee headed by KV Kamath 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 cases 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.

 

Timeline & Process For Restructuring

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

·         Lending institutions are required to sign an inter-creditor agreement ahead of the restructuring. Lenders who do not sign inter-creditor agreements within 30 days of invocation of resolution plan shall attract 20% provisions.

·         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. The one time restructuring scheme can then not be invoked for such cases again.

·         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.

·         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.

·         Conversion to any other non-equity instrument will lead to the value of that portion of debt being written down to Re 1.

·         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.

Asset Classification & Provisions

·         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.

Monitoring

The RBI has prescribed a clear monitoring period for accounts which are restructured under this scheme. 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.

·         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. If the default is not resolved within this review period, the account is classified as NPA by all lenders involved.

·         Lenders can write back half of the provisions held against restructured accounts after the borrower pays back at least 20% of the residual debt. The remainder of the provisions can be written back after another 10% of the residual debt is repaid, without the account slipping into NPA.

Disclosures

·         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.

·         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.

·         A disclosure format has been prescribed by the RBI as under: 

Format – A

Format for disclosures to be made in the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021

Type of borrower

(A)
Number of accounts where resolution plan has been implemented under this window

(B)
exposure to accounts mentioned at (A) before implementation of the plan

(C)
Of (B), aggregate amount of debt that was converted into other securities

(D)
Additional funding sanctioned, if any, including between invocation of the plan and implementation

(E)
Increase in provisions on account of the implementation of the resolution plan

Personal Loans

 

 

 

 

 

Corporate persons*

 

 

 

 

 

Of which, MSMEs

 

 

 

 

 

Others

 

 

 

 

 

Total

 

 

 

 

 

*As defined in Section 3(7) of the Insolvency and Bankruptcy Code, 2016

Format-B

Format for disclosures to be made half yearly starting September 30, 2021

Type of borrower

Exposure to accounts classified as Standard consequent to implementation of resolution plan – Position as at the end of the previous half-year (A)

Of (A), aggregate debt that slipped into NPA during the half-year

Of (A) amount written off during the half-year

Of (A) amount paid by the borrowers during the half-year

Exposure to accounts classified as Standard consequent to implementation of resolution plan – Position as at the end of this half-year

Personal Loans

 

 

 

 

 

Corporate persons*

 

 

 

 

 

Of which MSMEs

 

 

 

 

 

Others

 

 

 

 

 

Total

 

 

 

 

 

* As defined in Section 3(7) of the Insolvency and Bankruptcy Code, 2016

 

Conditions for the Resolution Framework for COVID-19-related Stress are spelt out in details by RBI. Readers may click on the following link for full details of the said circular no. RBI/2020-21/16 - DOR.No.BP.BC/3/21.04.048/2020-21 dt. 6th August 2020

 

How the One time Restructuring will impact the individual Borrowers:

This scheme covers the bulk of the existing loans sanctioned to individual borrowers and will help them in repaying their loans according to their current repayment capacity as opposed to their repayment ability when they borrowed the loan. This will mainly help those people whose salaries have been cut amid the pandemic or those who have lost their jobs and are not earning at the moment

This decision has come at a time when six-month moratorium announced on Equated Monthly Installment (EMI) is about to end on August 31, which means loan payments will start from September 1. Borrowers who must have opted for the 6-month moratorium can either repay it in one shot or ask lenders to add these to their existing EMIs. Now, borrowers also have the option of converting interest accrued during the moratorium period into a separate loan.

Additionally, borrowers can keep their EMI unchanged but the loan tenure can be extended as well. However, as per experts, if possible, borrowers should aim to pre-pay the EMIs within the next 12 months in order to get rid of the additional debt incurred. Pre-paying 120 per cent of the EMIs that borrowers had to defer is ideal, meaning if a person deferred five EMIs, they are advised to pre-pay six additional EMIs over the next 12 months as it will help them bounce back in repayment plan and get out of debt quicker.

Source: rbi.org.in, Bloomberg Quint & Times Now