RBI allows recast of home, personal & small biz loans

The Reserve Bank of India (RBI) on Wednesday stepped in to rescue retail and small business borrowers with loans of up to ₹25 crore, allowing lenders to restructure their debt and offer some respite from the stress induced by the second wave of the covid-19 pandemic.

Eligible categories would include consumer credit, education loan, loans given for creation or enhancement of immovable assets such as housing, and loans for investment in financial assets such as shares and debentures. It will also include loans taken by individuals for business purposes. Small businesses, including those engaged in retail and wholesale trade other than those classified as micro, small and medium enterprises (MSMEs) will also be eligible. In a separate notification, the central bank also allowed MSMEs with loans of up to ₹25 crore to be eligible for recast under what it calls Resolution Framework 2.0.

The last round of debt recast under a special window ended on 31 December and banks and non-banking financial companies (NBFCs) have been requesting RBI for another round of such benefits.

The second wave has been more challenging than the first one last year with mutant varieties of the virus wreaking havoc across the country. The lack of timely availability of medical-grade oxygen and covid medications have accentuated the problems.

Recasts will have to be invoked by 30 September and banks and non-bank financiers will get another 90 days to implement the plan. RBI said that the resolution process will be treated as invoked when the lender and the borrower agree to proceed towards finalizing a resolution plan. Once invoked, borrowers will also be eligible for additional loans.

Apart from the exposure limit of Rs25 crore, another crucial eligibility criterion is that the borrower’s loans should have been classified as standard as on 31 March. Standard loans are those that are being regularly serviced although loans continue to remain standard up to 90 days of delay, beyond which it becomes sub-standard or a bad loan.

The central bank directed lenders to frame board-approved policies within four weeks from Wednesday on implementation of viable resolution plans for eligible borrowers. The policy, RBI said, should detail the eligibility of borrowers for whom lenders will consider the resolution, and lay down the due diligence considerations to establish the necessity of implementing a resolution plan. Lenders will have to set aside 10% of the renegotiated debt exposure as provision buffers for each loan.

Financial sector commentators, bankers and industry associations lauded the move to support these borrowers in difficult times.

“The RBI governor has taken the financial sector battle against covid 2.0 head on with a clear focus on protecting lives and livelihoods. CII welcomes the support to individual and MSME borrowers and ease of banking through digital means,” said Uday Kotak, president of industry body CII. Kotak is also the head and promoter of Kotak Mahindra Bank.

In what would allow quicker resolution of stress, the regulator said that lenders will have to assess recast requests from borrowers and the decision communicated in writing within 30 days of receipt of the proposal. Moreover, each lender will independently decide on the recast for borrowers who have loans from multiple lenders.

Not only can lenders provide a moratorium of up to two years but can also use this new framework to tweak old recast contracts only to the extent of modifying moratorium and residual tenors.

“Unlike the asset-quality stress cycle five years back, which involved large corporates, this time around, smaller accounts, especially MSME and retail, are more vulnerable to the pandemic’s second wave,” said Krishnan Sitaraman, senior director, Crisil Ratings.

The RBI’s moves, Sitaraman said, are targeted accordingly: a one-time restructuring for individual borrowers and MSMEs; and allowing lenders to offer a more supportive repayment structure under last year’s restructuring package.


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