Though the Reserve Bank of India (RBI) did not extend the moratorium in its monetary policy review on Thursday, it allowed banks to restructure the loans of borrowers who are in financial difficulty and are unable to repay them.
Once restructured, such loans would be considered as standard. This means that the lenders won’t report the borrower as a defaulter to credit bureaus if the borrower follows the new payment structure.
In his speech, RBI governor Shaktikanta Das, said, “The disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board… Accordingly, it has been decided to provide a window under the 7 June Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures—without change in ownership—as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.”
Personal loans include those given to individuals and include consumer credit, education loan, loans given for creation or enhancement of immoveable assets (housing loan, for example), and loans given for investment in financial assets (shares, debentures, and so on), according to RBI.
According to RBI’s Resolution Framework for COVID-19-related Stress, the resolution of stressed personal loans will be available only to those borrowers who were repaying their loans regularly as on 1 March 2020.
Borrowers will need to get a resolution plan sanctioned before 31 December and the lender will need to implement it within 90 days. The restructured loan will continue to be considered as standard till the borrower sticks to the resolution plan.
RBI has also covered the facilities banks can offer to borrowers when restructuring the loan. They can reschedule the payments, covert interest into another credit facility, and provide moratorium of up to two years. The overall tenure of the loan can also be modified based on the resolution granted. “If someone has faced a salary cut, and his cash flows are affected, banks can lower the equated monthly instalment (EMI) and increase the tenure,” said Virendra Kumar Sethi, a former banker.
According to Madan Sabnavis, chief economist, CARE Ratings, banks may have a filtering mechanism and a criterion to decide who gets the resolution plan. “Otherwise, it’s difficult to offer resolution to retail customers as compared to institutions,” he said.
RBI wants lenders to offer the resolution plan only to eligible borrowers. Institutions could, therefore, have the discretion to choose the borrower based on the facts of the case. The facility, hence, could be available to genuine borrowers who have lost their jobs or have faced a high pay cut, putting stress on their finances.