Loan recasts: Small borrowers get fresh relief from RBI
Individuals and small enterprises with loans of up to Rs 25 crore which have never had a loan restructured before and is graded as standard as of March 31, 2021, will be liable for the latest settlement framework 2.0 programme.
The Reserve Bank of India (RBI) granted lenders permission on Wednesday to restructure small borrower accounts that had not benefited from the recast scheme for Covid-related stress last year.
The RBI is the lead controller of debt in India; hence the ruling can be made out to be a support to small account holders.
Individuals and small businesses with loans of up to Rs 25 crore, which had never had a loan restructured before and were graded as standard as of March 31, 2021, will be liable for the new settlement programme.
“The recent resurgence of the Covid-19 pandemic in India, as well as the related containment initiatives introduced at local/regional levels, have generated new complexities and harmed the nascent economic recovery. Individual borrowers, small businesses, and MSMEs are the most vulnerable categories of borrowers in this environment,” RBI governor Shaktikanta Das said in an unscheduled morning address.
Borrowers whose accounts have already been restructured under August 6, 2020, system were given additional relief by the RBI. Retail and micro, small, and medium-sized enterprises (MSME) loans with a moratorium of fewer than two years will now be available for an extension of the moratorium term. Lenders may also stretch the residual tenor for a period of two years.
Lending institutions were also allowed by the RBI to review working capital sanctioned thresholds as a one-time measure in the case of previously restructured MSMEs, based on a reassessment of the working capital duration and margins.
Lenders also predicted a new turnaround plan. There was also consolation that the proposed scheme was not a blanket one like the moratorium.
The system, according to Suresh Khatanhar, DMD, IDBI Bank, is timely and will provide relief to those affected by the renewed surge in Covid cases. “This will be a formal, tracked scheme that will solve clear gaps,” Khatanhar said. According to him, consolidation is a more versatile choice than reorganisation.
Last year, credit guarantee-backed liquidity assistance was made available. “In this case, the funding is not limited to 20%. They’ve even made it possible to reassess working capital constraints. As a result, the issues here can be discussed more comprehensively,” he added.
Allowing a reassessment of the working capital cycle for MSMEs that had previously been restructured, according to SS Mallikarjuna Rao, MD and CEO of Punjab National Bank (PNB), would help align the working capital cycle to the current market climate.
Any business insiders questioned whether two years would be enough time for the worst-affected industries to recover. Entities that prolong their moratorium term under the recast scheme will be expected to resume operations by 2022 and begin paying their instalments after two years, according to Jyoti Prakash Gadia, managing director, Resurgent India. “However, it remains unclear whether adversely impacted sectors like hospitality, transport and tourism and leisure will recover in the next two years,” he added.
The small number of retail accounts restructured suggests that the resolution system 2.0 of the RBI acknowledges that its predecessor could not have adequately resolved the stress arising from Covid. This has been accepted by bankers as well.
Sanjiv Chadha, MD and CEO of Bank of Baroda (BoB), said in January that retail borrowers made up a limited portion of the bank’s restructured book. “As a result, we have not been able to fix any burden might be present, at least in the turnaround mode — which means that either customer will start paying on time or there is a good chance that some tension may be caused by NPAs (non-performing assets),” he added.
In comparison to last year’s freeze, analysts say the new proposals are milder. “This measure (resolution mechanism 2.0) is much milder than the blanket loan moratorium issued last year, and the proportion of restructured loans will be lower,” said Srikanth Vadlamani, vice-president – senior credit officer, financial institutions division, Moody’s Investors Service. Nonetheless, the need for this step reflects the reemergence of downside asset quality risks for banks.