RBI brings in KV Kamath to set the boundaries for a one-time restructuring of loans
- The Reserve Bank of India (RBI) is bringing in
KV Kamathto head up a new committee that will look into the one-time restructuring of loans.
- The committee will look into the financial parameters that need to be factored into resolution plans.
Loan resolutionbeyond a certain amount will also be validated by the committee before implementation.
The existing scheme for restructuring MSMEs is being extended to cover loans that were classified as standard as of March 1. Das said that for any new borrowers coming into the fold that the restructuring has to be implemented before 31 March 2021.
“The underlying theme of this resolution window is the preservation of the soundness of the Indian banking sector,” said Das highlighting that safeguards will be put in place like prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring.
The one-time restructuring of loans or resolution window will be implemented under the Prudential Framework dated 7 June 2019.
Prudent entry norms
Banks and other lending institutions can only extend this facility to borrowers that are facing stress on account of COVID 19. But when it comes to types of loans, everyone is fair game — from big corporate loans to personal loans.
Banks will also need to make sure that any resolution plan adheres to the eligibility criteria put forward by the RBI. For instance, MSME borrowers with aggregate exposure of ₹25,000 crore or less as of March 1 will not be eligible. Financial service providers, credit societies, and government loans will not be eligible either.
The Expert Committee headed by Kamath will also bring in sector specific benchmark ranges for the financial parameters that need to be taken into account.
Clearly defined boundary norms
In addition to the financial parameters that will cover aspects of leverage, liquidity, and debt serviceability among other things, the Expert Committee will also be called on to vet resolution plans for loans where the amount is ₹1,500 crore or more.
The Confederation of Indian Industry (CII) has suggested that business should only be given enough money to survive, not grow and the money should be given on priority — it will have precedence over all other obligations of the company.
The CII had also recommended that loans not be classified as non-performing assets (NPAs) as a part of the restructuring. RBI seems to agree provided the resturcturing of loans is carried out within the stipulated timlines.
This means that banks will still have to set aside 15% of the loan value to cover the default risk. Which means the levels of provisioning will continue to remain high and the demand for capital is unlikely to subside if bad loans grow.
Considering the uncertainty brought on by the coronavirus pandemic, borrowers are likely to be more conservative in their estimates for recovery. The difference could be as much as a borrower needing one year to recover in a pre-COVID world versus five years to recover post-COVID, according to EY analyst Abizer Diwanji.
The RBI is only allowing banks to give up to two years for borrowers to pay back the pending amount of their loans.
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