Loan recasts: Small borrowers get fresh relief from RBI

The resolution framework 2.0 may be an acknowledgement that its predecessor may not have fully addressed the stress emerging from Covid, as suggested by the limited number of retail accounts restructured. Bankers have also acknowledged this.

The Reserve Bank of India (RBI) on Wednesday allowed lenders to carry out a fresh round of restructuring of small borrower accounts which had not availed of the benefit of the recast scheme for Covid-related stress last year.

Individuals and small businesses with loans of up to Rs 25 crore who have never undergone restructuring before and who were classified as standard as on March 31, 2021, shall be eligible under the new scheme, titled resolution framework 2.0.

“The resurgence of Covid-19 pandemic in India in recent weeks and the associated containment measures adopted at local/regional levels have created new uncertainties and impacted the nascent economic revival that was taking shape. In this environment the most vulnerable category of borrowers are individual borrowers, small businesses and MSMEs,” RBI governor Shaktikanta Das said in an unscheduled morning address.

Further relief was offered to borrowers whose accounts have already been restructured under the August 6, 2020, framework. Retail and micro, small and medium enterprises (MSME) loans where the resolution plan permitted a moratorium of less than two years will now be eligible for an increase in the period of moratorium. Alternatively, lenders could extend the residual tenor up to a total of two years. In the specific case of MSMEs restructured earlier, lending institutions were also permitted as a one-time measure, to review working capital sanctioned limits, based on a reassessment of the working capital cycle and margins.

Lenders said a fresh restructuring scheme was expected. There was also a sense of relief that the scheme on offer was not a blanket one, like the moratorium.

Suresh Khatanhar, DMD, IDBI Bank, said the framework is a timely one which will ensure comfort to those impacted by the renewed surge in Covid cases. “This will be a structured, monitored scheme where specific gaps will be addressed,” Khatanhar said. He explained that restructuring is a more flexible option as compared to the credit guarantee-backed liquidity support offered last year. “Here the support is not limited to 20%. They have also allowed reassessment of working capital limits. So the problems here can be addressed in a more comprehensive manner,” he said.

SS Mallikarjuna Rao, MD and CEO, Punjab National Bank (PNB), said allowing a reassessment of the working capital cycle for MSMEs restructured earlier shall help align the working capital cycle to the present business environment.

Some industry players wondered whether two years would be time enough for the worst-hit sectors to get back on their feet. Jyoti Prakash Gadia, managing partner, Resurgent India, said entities which extend their moratorium period under the recast scheme will be expected to revive their operations by 2022 and start paying their instalments after two years. “However, it is still uncertain that the revival of adversely affected sectors such as hospitality, travel and tourism and leisure will take place within the span of two years,” he said.

The resolution framework 2.0 may be an acknowledgement that its predecessor may not have fully addressed the stress emerging from Covid, as suggested by the limited number of retail accounts restructured. Bankers have also acknowledged this.

In January, Sanjiv Chadha, MD and CEO, Bank of Baroda (BoB), had said retail borrowers accounted for a very small proportion of the bank’s restructured book. “Therefore, we have not been able to address whatever stress might be there at least through the restructuring mode — which means that either people will either actually start paying up on time [or]there is a fair possibility that some stress will come through NPAs (non-performing assets),” he had said.

Analysts described the latest measures as more moderate compared with last year’s moratorium. Srikanth Vadlamani, vice-president – senior credit officer, financial institutions group, Moody’s Investors Service, said, “This measure (resolution framework 2.0) is much milder than the blanket loan moratorium given last year and the proportion of restructured loans will be lower. Nevertheless, the need for this measure highlights the re-emergence of downside risks to banks’ asset quality.”