Explained: How RBI's new loan restructuring framework is different from previous schemes


The Reserve Bank of India (RBI) has allowed financial institutions a special one-time dispensation to restructure loans which are stressed due to the Covid-19 pandemic. The so-called Resolution Framework for Covid-19 related stress has been formed as a special window under the June 7, 2019 RBI guidelines for restructuring and allows banks to give borrowers more time to pay back without classifying a loan as an NPA. However, unlike the June 7 guidelines, it has a strict timeline and needs a special committee to vet the large loans.

Following is the comparison between the previous restructuring schemes and the new Covid-19 related framework.

ENTRY BARRIERS

  • Earlier schemes had no entry barriers
  • The present scheme is for only accounts which are in stress due to Covid and only for borrowers which are not in default for more than 30 days as on the cutoff date of March 1, 2020

DEFINED TIMELINES

  • There were no specifi ed timelines in the previous schemes
  • In the Covid-linked scheme banks have to decide by December 31 on which accounts are eligible for restructuring 2020
  • Individual and MSME loans have to be restructured by March 31, 2021 while corporate loans by June 30, 2021

CLEARLY DEFINED CONTOURS

  • Earlier schemes had no restrictions on how lenders restructure loans
  • The current scheme specifi es that loan tenure cannot be extended beyond two years
  • There could also be sector-specifi c fi nancial parameters set by the Kamath committee

PENALTIES FOR DELAYS

  • Earlier schemes had no disincentives for lenders delaying an agreement for restructuring
  • The Covid scheme provides a for a 20% penal provision for lenders not signing the inter-creditor agreement
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INDEPENDENT VALIDATION

  • Earlier, loans above Rs 500 crore needed a rating from at least two rating agencies
  • The Covid norms say that 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 the fi ve-member Kamath committee

PROVISIONING

  • Provisioning was only 5% earlier with a reversal allowed after one year, which was misused
  • The Covid norms require 10% provisions and there is no straight reversal
  • Lenders can reverse 50% provisions on repayment of 20% loans and the other 50% on further 10% repayment

POST-MONITORING PERFORMANCE

  • There was no disincentive to the borrower for not making timely payments after implementation of the plan
  • 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





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