New Loan-Restructuring Scheme

Why in news?

The Reserve Bank of India gave the green signal to a loan-restructuring scheme for stressed borrowers.

What is the scheme?

This scheme is a special window that provides one-time loan restructuring to companies and individuals.
It will provide relief specifically to those impacted by the 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 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 until the date of invocation.
The one-time restructuring window is available across sectors.

The companies that were already in default for more than 30 days as on March 1 cannot avail this facility.
This could affect revival plans of companies that were about to regain profitability but were hit when the lockdown was imposed.

For personal loans, the resolution plan can be invoked until December 31, 2020 and will be implemented within 90 days thereafter.

How will it be implemented?

The RBI has set up a five-member expert committee headed by K V Kamath.
This committee will make recommendations on the financial parameters required.
It will recommend the sector-specific benchmark ranges for such parameters to be factored into each resolution plan for borrowers with an exposure of Rs 1,500 crore or above at the time of invocation.
It 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.
This means the RBI will have the last word on who will be eligible and the parameters.
As per the RBI, the most adversely affected sectors by the pandemic are tourism and hospitality, construction and real estate, and aviation.

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.
Banks will not face much of a problem in working out individual resolutions plans.
But they will have to tackle borrowers who were in stress after the pandemic hit.

Were earlier such schemes not misused by banks and corporates?

Strategic Debt Restructuring (SDR) scheme - Banks were given an opportunity to convert the loan amount into 51% of equity.
This equity was to be sold to the highest bidder, once the firm became viable.
This was unable to help banks resolve their bad loan problem as only two sales have taken place through this measure due to viability issues.

Sustainable Structuring of Stressed Assets scheme - Banks were unwilling to grant write-downs as there were no incentives to do so.
Write-downs of large debtors could exhaust banks’ capital cushions.

Asset reconstruction scheme - The major problem was that asset reconstruction companies were finding it difficult to resolve assets they had bought from banks.
Therefore, they wanted to purchase the loans only on low prices.
Consequently, banks were reluctant to sell them loans on a large scale.

Does the new scheme have safeguards against misuse?

Yes, the RBI has built in safeguards in the resolution framework to ensure it does not lead to ever greening of bad loans.
Restructuring of large exposures will need independent credit evaluation done by rating agencies and a process validation by the expert committee.
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 Inter-Creditor Agreement (ICA).
To mitigate the impact of expected loan losses, banks need to make a 10% provision against such accounts under resolution.
For banks not willing to be part of the ICA, a penal provision of 20% has been specified.

What are the major differences with previous recast schemes?

The earlier restructuring schemes did not have any entry barrier.
The current scheme is available only for companies facing Covid-related stress, as identified by the cut-off date of March 1.
Strict timelines for invocation of resolution plan and its implementation have been defined in the scheme.
In the past, this was largely open-ended.
Independent external evaluation, process validation and specific post-resolution monitoring are further safeguards.

Source: Indian Express