Principles of Loan Restructuring by the Reserve Bank of India (RBI)

The phenomenon of loan restructuring, often referred to as moratorium, rephasing, recasting, or rescheduling, involves temporarily altering the terms of a loan to provide relief to borrowers facing financial difficulties due to unforeseen events, such as the pandemic. This article discusses the principles and procedures of loan restructuring as per the policies and guidelines set forth by the Reserve Bank of India (RBI).

Understanding Loan Restructuring

Loan Restructuring: The process of modifying the loan agreement to provide financial relief to borrowers. This modification can include changes to the repayment schedule, interest rates, or loan terms. The objective is to ensure that the borrower can adhere to the new repayment plan.

Background and Context

Initially, the RBI permitted a moratorium to borrowers who did not foresee such extreme situations. The moratorium allowed temporary relief from EMI payments without classifying the account as a Non-Performing Asset (NPA) and without affecting credit scores. However, this relief came at a cost to the lenders, as interest accrued but was not collected, and expenses had to be covered from own capital.

Impact of Loan Moratorium and Extending Relief

As the moratorium could not be extended indefinitely due to liquidity constraints, the RBI introduced loan rescheduling for individuals and industries. Rescheduling ensures that the total debt remains the same but its repayment is stretched over a longer period, providing financial breathing space to the borrowers.

Loan Rescheduling for Individuals: Retail borrowers, particularly those affected by job losses or salary cuts, can restructure their loans. The key principles include:

Real assessment of the borrower's situation. Reevaluation of the loan proposal originally submitted, including income, expenses, and expected cash flows. Modification of the loan tenure to match the borrower's current financial reality.

Guidelines and Eligibility Criteria

In line with the RBI's Resolution Framework for COVID-19-related Stress, loans can be rescheduled only if borrowers were prompt in repaying their loans regularly as of March 1, 2020. Any overdue payments disqualify the borrower from restructuring. The process is strictly regulated with deadlines and timelines:

Borrowers must submit a restructuring plan by December 31, 2022. Lenders must implement the restructuring plan within 90 days.

The RBI has provided flexibility for lenders to:

Reschedule payments Convert interest into another credit facility Offer a moratorium up to two years Modify the overall loan tenure

Challenges and Considerations

Verification and Personalized Assessment: It is particularly challenging to restructure retail loans due to the difficulty in verifying the reasons for financial distress compared to industrial projects. Lenders must exercise discretion and practicality in approving restructuring plans based on individual circumstances.

Impact on Credit Bureaus: Once the loan is restructured, it will be considered standard, and the borrower will not be reported as a defaulter to credit bureaus, provided they adhere to the new payment structure.

Conclusion

Loan restructuring, while beneficial in providing short-term relief, requires a comprehensive and personalized approach. The RBI's guidelines ensure that both borrowers and lenders adhere to strict procedures to manage financial stress effectively. Understanding and following these principles can help navigate the complexities of loan restructuring during challenging times.