RBI allows one-time restructuring of loans. Here's what it means for businesses and individual borrowers

The Reserve Bank of India (RBI) has allowed a one-time restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the Covid 19 pandemic.

The central bank will also form a expert committee headed by former ICICI Bank CEO KV Kamath to suggest ways in which the restructuring will be implemented, governor Shaktikanta Das said. The committee will also vet proposals for restructuring of loans of Rs 1,500 crore and above.

"We have decided to provide a window for restructuring of loans without downgrading them according to the June 7 2019 circular. Care will be taken that past experience of restructuring is not repeated and enough safeguards will be followed," Das said in his statement which followed the monetary policy.

Lending institutions have been asked to frame board approved policies to implement viable resolution plans for eligible borrowers under this framework. The policies shall, detail the eligibility of borrowers and lay down the due diligence considerations to be followed by the lending institutions. March 1 has been set as the reference date for the outstanding amount of debt for restructuring.

The resolution plan may also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt. The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years, RBI said.

Corporate restructuring may be done by converting a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower, provided the amortisation schedule and the coupon carried by such debt securities are similar to the terms of the debt held on the books of the lending institutions, post implementation of the resolution plan.

In case the lending institutions convert any portion of the debt into any other security, the same shall collectively be valued at Rs 1. For accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs.100 crore and above, a compulsory independent credit evaluation (ICE) by any one credit rating agency (CRA) will be required.

Personal loans have also been included in the restructuring execpt those given to staff of the lending institutions. Accounts which were standard, but not in default for more than 30 as on March 1, 2020 will be considered and the restrcuturing has to be invoked not later than December 31, 2020 and must be implemented within 90 days from the date of invocation, RBI said.

"The resolution plans may inter alia include rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years. Correspondingly, the overall tenor of the loan may also get modified commensurately," RBI said.

In case of corporate borrowers. if there are multiple lending institutions with exposure to the borrower, the resolution process shall be treated as invoked in respect of any borrower if lending institutions representing 75% by value of the total outstanding credit facilities (fund based as well non-fund based) , and not less than 60% of lending institutions by number agree to invoke the same.

For corporate loans, the restructuring has to be implemented within 180 days from the date of invocation. "In all cases involving multiple lending institutions, where the resolution process is invoked and consequently a resolution plan has to be implemented, inter creditor agreement (ICA) shall be required to be signed by all lending institutions within 30 days from the date of invocation," RBI said.

Banks that fail to sign the ICA within 30 days have to make a 20% provision on these loans compared to 10% for banks which have signed the ICA.

The RBI will also constitute a committee under Kamath which shall recommend a list of financial parameters which, in their opinion would be required to be factored into the assumptions that go into each resolution plan, and the sector specific benchmark ranges for such parameters.

"The parameters shall inter alia cover aspects related to leverage, liquidity, debt serviceability etc. The expert committee shall submit a list of financial parameters and the sector-specific desirable ranges for such parameters to the Reserve Bank, which, in turn, will notify the same, along with modifications, if any, within 30 days," RBI said.

The committee will also vet the resolution plans of total loan exposures of Rs.1500 crore and above. "The committee shall check and verify that all the processes have been followed by the parties concerned as desired without interfering with the commercial judgments exercised by the lenders. The committee would be based out of the Indian Banks’ Association (IBA) and its compensation and expenses shall be borne by the Reserve Bank.
Loans to micro and small enterprises will also be restructured, upto to an aggregate of Rs 25 crore per borrower.

These companies have to be GST registered and banks and NBFCs have time till March 31, 2021 to implement the plan. Banks will have to make an additional 5% provision for these accounts.