RBI Allows One-Time Restructuring Of Corporate, Personal Loans

In a major relief to corporate and retail borrowers, the Reserve Bank of India (RBI) on Thursday permitted banks to go for one-time restructuring of loans that are facing stress due to the COVID-19 crisis with a view to mitigating risks to financial stability. The restructuring will be allowed as per the prudential framework issued on June 7, 2019, RBI Governor Shaktikanta Das said. RBI also announced setting up of an expert committee headed by veteran banker K V Kamath which will give recommendations on various parameters to be factored into each resolution plan for corporate loans.

"With the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window...to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as standard, subject to specified conditions," RBI said in its Statement on Developmental and Regulatory Policies.

While announcing the monetary policy, Governor Das said, "The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector."

Bankers had pitched for a one-time loan recast of accounts facing challenges due to the pandemic. The Indian Banks Association (IBA) had also given its recommendation on the same to RBI.

Last week, Finance Minister Nirmala Sitharaman had said the government is working with the RBI on the need for restructuring of loans to help the industry tide over the impact of COVID-19.

"The focus is on restructuring. Finance ministry is actively engaged with RBI on this. In principle, the idea that there may be a restructuring required, is well taken," Sitharaman had said.

RBI further said the resolution under this window is extended only to borrowers facing stress on account of COVID-19. In light of past experiences with regard to use of regulatory forbearances, necessary safeguards are being incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring, RBI said.

Only those borrower accounts shall be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020, it said.

The central bank said the resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation. Lenders shall have to keep additional provisions of 10 per cent on the post-resolution debt.

"The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years," it said.

RBI said it is constituting an expert committee under the chairmanship of K V Kamath which shall make recommendations to it on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into each resolution plan.

The expert committee shall also undertake a process validation of resolution plans for accounts above a specified threshold.

RBI said wherever the resolution plans involve conversion of a portion of debt into equity and other debt instruments, the debt instruments with terms similar to the loan shall be counted as part of the post-resolution debt, whereas the portion converted into other non-equity instruments shall be fully written down.

With respect to personal loans, a separate framework is being prescribed, RBI said.

"The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter," it said.

The shorter timeline for personal loans is assessed to be adequate since unlike larger corporate exposures, there will not be any requirement for third-party validation by the expert committee, or by credit rating agencies, or need for inter-creditor agreement (ICA), RBI said.

The contours of the plan may be decided based on the board approved policies of the lenders subject to extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years, it said.

The central bank said lenders will have to make disclosures on the number of accounts where one-time restructuring has been implemented under this window on a quarterly basis starting March 31, 2021.

Speaking on the one-time loan recast, State Bank of India Chairman Rajnish Kumar said the RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring.

"We welcome the fact that a new resolution framework for COVID-19-related stress facility has been extended to large corporate, SME and personal loans with necessary safeguards in each segment," Kumar said.

Indian Bank Managing Director and CEO Padmaja Chunduru said the RBI has announced a well-rounded step as it addresses stress not only in the corporate segment but in MSMEs and retail sectors also.

"Banks wanted some flexibility in assessing the restructuring requirement and I think that is met now," she said.

Bank of Maharashtra MD and CEO A S Rajeev said the regulatory changes like setting up of an expert committee for corporate and personal loans resolution plans and increased loan-to-value for gold will provide adequate support to the financial industry and to the wider economy. L Viswanathan, Partner, Cyril Amarchand Mangaldas, said the restructuring guidelines are an appropriate balance of being cognizant of the immediate distress as well as the longer term safeguards.

PwC Partner Kuntal Sur said the proposed restructuring window covers all sectors and would provide much needed lifeline to corporates and retail borrowers impacted by the COVID-19 crisis.