Banks may segregate loans for debt restructuring plan
Corporate borrowers will be offered customised solutions because of the complexity of their contracts and the involvement of multiple banks. Individual borrowers will be given a standardized package if they can show substantial loss of income because of Covid-19.Updated: Aug 21, 2020, 07:57 IST
Lenders are racing against time to prepare guidelines to determine eligibility and ensure borrowers do not misuse a one-time loan restructuring package to be offered to stressed individuals and companies once the repayment moratorium ends in a little more than a week.
Many lenders are setting up internal groups to vet debt recast applications, and plan to divide them into two buckets—customized and standardised—for quicker resolution of proposals.
Corporate borrowers will be offered customised solutions because of the complexity of their contracts and the involvement of multiple banks. Individual borrowers will be given a standardized package if they can show substantial loss of income because of Covid-19.
“There is a need for proper checks to prevent any misuse of the restructuring package. During the moratorium period, there were many instances of borrowers with necessary resources to repay failing to do so,” a senior banker said, requesting anonymity. The Reserve Bank of India (RBI) has allowed banks to restructure some loans to support economic recovery and help hard-pressed individuals and companies tide over the ongoing coronavirus crisis. With production still to recover to pre-Covid levels after the lockdown, lack of demand and job losses, bad loans are expected to surge to the most in 20 years after RBI’s loan moratorium ends on 31 August.
RBI set up a five-member panel under the chairmanship of former ICICI Bank chief executive KV Kamath on August 7 to recommend eligibility parameters for restructuring stressed loans. On August 6, RBI said that every lender must put in place a board-approved policy on how to assess recast proposals.
“Banks are framing the policies, subject to the final recommendations of the Kamath committee. We don’t want to wait for the recommendations and then frame our policies,” said the banker with a state-run bank. “By next month, the broad contours of the restructuring package and the stressed portfolios will be clear.”
Under RBI’s new resolution framework, lenders have been allowed to offer a one-time restructuring of stressed accounts without classifying them as non-performing.
Borrowers’ loan accounts must be classified as standard and not in default for more than 30 days with any lender as on 1 March to utilise the recast package.
“My view is, not many retail borrowers will seek loan recast. Broadly, lenders are inclined to give a six-month extended moratorium in case of job losses and for three months if there is a wage cut in case of retail loans,” a second banker said, also seeking anonymity.
According to the banker, the Kamath committee will focus on the viability of the entity and whether a recast would give it a breather. “If a borrower does not have a decent interest-coverage ratio and is not able to service interest even with the re-scheduling, it has got a bigger problem and, therefore, needs to be restructured under the 7 June circular (without the NPA benefit),” he added.
India Ratings and Research expects 7.7% of total bank loans to need debt recast, including 5.8% of corporate loans.