Loan Restructuring: RBI’s Latest Tool To Help Revive India’s Financial And Real Sector

By: Tavaga Research

The Reserve Bank of India (RBI) in March 2020 announced a loan moratorium in the interest of the public distressed by the pandemic’s first wave. The loan moratorium, initially announced for three months ending in June, was extended for another two months until August 31. The Supreme Court (SC) recently extended the moratorium period till September 28, maintaining the RBI’s directive to banks to not penalize accounts for non-payment of dues on term loans.

What is Loan Restructuring as per RBI?

Loan restructuring gives the borrower the option to not only avail a moratorium window but also reschedule loan payments, convert accrued interest to a smaller loan and even lower the interest rate as per negotiations with the lender. Loan moratoriums don’t change the structure of the loan. The process aims to provide material long-term relief to borrowers pushed into financial distress by the pandemic. Again, loan restructuring will neither affect the asset quality in a bank’s balance sheet nor the borrower’s credit standing over the special window granted by the central bank which terminates on December 31, 2020.

As per the new RBI rules on loan restructuring, lending institutions can now restructure debt keeping the account as standard instead of having to classify them as NPAs. The one-time restructuring scheme is a win-win for both the parties involved; the borrowers evade forced bankruptcy, and the lenders stand to recover more than what they would have in the case of liquidation of the borrower. 

The loan restructuring scheme applies to all personal and corporate loans disbursed by any lending institution, which came under stress during the pandemic. However, NBFCs, MSME borrowers with total loans outstanding of less than Rs 25 crores, farm credit, loans to Government bodies are not eligible for this one-time restructuring scheme.

To ensure genuine applications to this scheme, the banks will only consider loan restructuring for borrowers making regular payments toward their outstanding loan and repayments which were not due for more than 30 days as of March 31, 2020. For personal loans, the resolution plan should be executed within 90 days following an agreement on loan restructuring. For corporate loan, it should take no more 180 days to implement the restructuring plan provided that the lenders to the corporate loan have signed an inter-creditor agreement (ICA) within 30 days of invoking an agreement.

As per a CRISIL report, every three in four companies availing the loan moratoriums were sub-investment grade (rated BB+ or lower). The report indicated that 75% of companies benefiting from loan moratorium relief were already facing liquidity or operational issues. However, the condition in place for loan restructuring will immunize lenders from excessive defaults in the future. Bankers estimate that a minuscule 2-3 percent of retail loans will qualify for restructuring scheme. India Ratings has estimated that on an overall basis, 7.7 percent of bank loans amounting to Rs 8.4 lakh crores will be subject to this framework.

What is the Difference between Loan Rescheduling and Loan Restructuring?

Loan rescheduling is one of the options available while restructuring a loan. Loan restructuring is changing the terms of the loan in that loan rescheduling is one of such changes. Loan rescheduling typically entails extending the payment period and adding the number of installments, which essentially increases the tenure of the loan facility. Loan rescheduling is one of the methods at the lender’s disposal to restructure a loan and provide relief to the borrower. 

Can Loan Restructuring be detrimental to the Stakeholders?

Under normal circumstances, defaulting on a loan payment generally downgrades the account to NPA and downgrades the borrower’s credit standing. The banker has to set aside 15% of the loan value as provisions in case of bad debts which adversely affects the balance sheet and the profitability of the bank. In the worst-case scenario, the borrower has to declare bankruptcy to be able to reap the benefits of loan restructuring.

Presently under the one-time restructuring scheme, the risk of borrowers defaulting in the future is still existent but minimized to a certain degree. The scheme will initiate cash flows, and some cash flow is better than no cash flow given the need to maintain liquidity through these difficult times.

The restructuring scheme is free from misuse, unlike the loan moratorium facility, and is likely to result in favorable payment realization from the stressed borrowers. The lenders also will not be forced to set aside provisions as the accounts will remain standard.

What is the KV Kamath Committee?

KV Kamath Committee is an expert committee appointed by the RBI to recommend financial parameters based on which loan recast for corporate stressed debt will be carried out. The committee is headed by KV Kamath, a veteran banker who served as a former CEO of ICICI bank. 

The primary role of the committee is to provide RBI with a list of parameters that lending institutions have to adhere to while drafting resolution plans for stressed corporate debt. The committee is also responsible for validating resolution plans for accounts with aggregate exposure of more than Rs 1,500 crores.

Key takeaways from the KV Kamath Committee recommendations

• The committee identified parameters for 26 stressed sectors, findings of which have been accepted by the RBI. The committee acknowledged the stress build-up in financial services, real estate, power, and steel

• The committee focused on solvency, liquidity, and coverage ratios unique to each listed sector. These ratios will determine the resolution plans for the firms applying for debt restructuring

• High debt to EBITDA ratio suggested for the real estate sector which means companies with higher ratio can claim a suitable resolution plan from the bankers

• Recommendation to benefit small companies in the auto dealership and auto component sector

• Aviation sector indifferent to the recommendations stating that the outlined ratios are not representative of their cash and carry revenue model and other prevalent liquidity ratios in the sector

• State-owned banks welcome the recommendations expecting major relief to companies with a strong financial background

The restructuring scheme is likely to be effective as it is time-bound and foolproof from misuse. The authorities at the apex are endeavoring to aid the public cope with distress. As per the recent SC ruling, accounts that were not classified as NPA till August 31 this year will not be declared NPA until further orders. The SC ruling combined with the loan restructuring scheme is a step to revive the businesses affected during the lockdown period. 

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