Recently, the Reserve Bank of India (RBI) cleared a loan restructuring scheme for borrowers who are under stress due to the pandemic.
The Federal Reserve Bank of India left the repo rate unchanged at 4% in its monetary policy committee (MPC) meeting. The MPC maintains an accommodative stance. The reverse repo rate also stands unchanged at 3.35%. The members of the MPC voted unanimously in favour of the choice.
With this meeting, the MPC completed four years since it came into existence. The meeting lasted for 3 days between August 4- 6. The panel was headed by Mr Shaktikanta Das with other members of the panel: Dr Chetan Ghate, Dr Pami Dua, Dr Ravindra H. Dholakia, Dr Mridul K. Saggar and Dr Michael Debabrata Patra.
This is a six-member panel that assesses the condition of macroeconomic situations. On the ultimate day of the meeting, the MPC decides upon various factors for the economy and issues out for the general public.
“Given the uncertainty surrounding the inflation outlook and very weak state of the economy within the midst of an unprecedented shock from the continued pandemic, the MPC decided on to stay the policy rate on hold,”
The MPC will continue with the accommodative stance “as long as necessary to revive growth, mitigate the impact of COVID-19,”, Shaktikanta Das, governor, RBI, said in his address.
Who are the Beneficiaries?
This one-time restructuring window is out there across sectors and is predicted to supply relief to companies that were servicing loan obligations on time but could have found it difficult after March because the pandemic affected their revenues.
Only those companies and individuals whose loans accounts are in default for less than 30 days as on March 1, 2020, are eligible for one-time restructuring.
For corporate borrowers, banks can invoke a resolution plan till New Year's Eve, 2020, and implement it till June 30, 2021, and such loan accounts should still be standard till the date of invocation.
For personal loans, the resolution plan is often invoked till New Year's Eve, 2020, and can be implemented within 90 days thereafter and this may be for accounts classified as standard, but not in default for quite 30 days as on March 1.
Companies that were already in default for quite 30 days as on March 1 cannot avail this facility.
Implementation:
The RBI has found out a five-member expert committee headed by K V Kamath, former Chairman of ICICI Bank, which can make recommendations on the financial parameters required.
The panel will recommend the sector-specific benchmark ranges for such parameters to be factored into each resolution plan for borrowers with aggregate exposure of Rs 1,500 crore or above at the time of invocation.
The committee will undertake a process validation of resolution plans for accounts above a specified threshold. The RBI will notify this alongside modifications in 30 days.
The RBI will have the last word on who is going to be eligible and therefore the parameters.
How this may impact the banks?
The banks are going to be ready to check the increase in non-performing assets (NPAs) to an excellent extent.
It will not bring down the NPAs from these levels but bad loans of on the brink of Rs 9 lakh crore will remain within the system. Banks will need to maintain a further 10% provisions against post-resolution debt.
Lenders that don't sign the Inter Creditor Agreement (ICA) within 30 days of invocation of the plan will need to create a 20% provision and this may be a burden for banks.
The banks won’t face much of a drag in understanding individual resolutions plans: they're going to need to tackle only borrowers who were in stress after the pandemic hit.
Safeguard measures:
The RBI has built-in safeguards within the resolution framework this point to make sure it doesn't cause ever-greening of bad loans as within the past.
Restructuring of huge exposures would require independent credit evaluation done by rating agencies and process validation by the Kamath-led expert committee.
For personal loans, there'll be no requirement for third party validation by the expert committee, or by credit rating agencies, or need for ICA.
The RBI has said that the term of loans under resolution can't be extended by quite two years and within the case of multiple lenders to one borrower, banks got to sign an ICA.
To mitigate the impact of expected loan losses, banks got to make the tenth provision against such accounts under resolution and for banks not willing to be a part of the ICA, a penal provision of 20% has been specified.
How it's different from past schemes?
The earlier restructuring schemes didn't have any entry barrier, unlike the present scheme that's available just for companies facing COVID-related stress, as identified by the deadline of March 1.
Strict timelines for invocation of resolution plan and its implementation are defined within the scheme, unlike within the past when this was largely open-ended.
The structuring of the scheme makes the signing of the ICA largely mandatory for all lenders once the resolution plans are majority-voted for, otherwise, they face twice the quantity of provisioning required.
Independent external evaluation, process validation and specific post-resolution monitoring are further safeguards.