RBI allows banks to restructure loans to tide over virus-induced stress
Photo Credit: Reuters

The Reserve Bank of India has allowed banks to restructure loans without classifying them as bad debts and pushing the defaulters into bankruptcy as a one-time measure to deal with the stress induced by the coronavirus pandemic.

RBI governor Shaktikanta Das said on Thursday the central bank has decided to “provide a window” under its June 7, 2019, stressed assets framework to enable lenders to recast corporate loans without any change in ownership.

Banks will also be allowed to restructure personal loans. This one-time facility will be subject to certain conditions, Das said in a statement after the RBI’s monetary policy committee kept interest rates on hold.

“The disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board. A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities,” Das said. “This can potentially impact their long-term viability and pose significant financial stability risks if it becomes wide-spread.”

The RBI decision comes in the light of concerns that banks’ bad loans could surge in coming months as the Indian economy plunges into a recession for the first time in four decades. In fact, banks had sought permission from the RBI in June to recast debt worth Rs 3 trillion ($40 billion) given to companies in stressed sectors such as aviation, hospitality and commercial real estate fearing a rise in bad loans.

Das didn’t immediately specify whether the RBI was again extending a loan repayment holiday. The RBI had earlier allowed banks to offer borrowers a three-month moratorium starting March. It later extended this period by three months to August-end. Many top industry executives have, however, opposed another extension.

Das also said that necessary safeguards have been incorporated while allowing the one-time restructuring of loans. These safeguards include prudent entry norms, binding covenants, independent validation and strict post-implementation performance monitoring.

“The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector,” he said.

The RBI will also set up a committee headed by former ICICI Bank CEO KV Kamath to determine the standards and sectoral norms required for such assets to be eligible for restructuring.

In another measure, the RBI allowed banks to restructure the loans to distressed micro, small and medium-sized (MSMEs) borrowers provided their debts were deemed standard before March 1, 2020.

The RBI had previously unveiled a restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020. The new restructuring scheme will have to be implemented by March 31, 2021, it said.

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