Why this concerns you?

Many borrowers like you and me are facing deep economic stress due to the pandemic. Some of the people have lost their jobs and some are working with significant pay cuts. This has caused people to default on their loan repayments. RBI has to come to their aid since the start of the pandemic by issuing out a loan moratorium from March 2020.

This moratorium period ended on 31st August 2020. Till then, borrowers were allowed to defer from their repayments. Now RBI has advised the banks to restructure the loans of stressed assets so that the banks do not have to count them into NPAs. But the central bank is still very sceptical about this step.

What is Loan Moratorium?

When a borrower takes a loan, he is obligated to pay his monthly instalments to the banks. Loan Moratorium is a period during which the borrower is relieved from the obligation to pay fixed instalments. Once the loan moratorium period is over, he is again bound to pay the fixed instalments at fixed regular intervals.

Restructuring of loans

RBI has allowed banks to restructure loans of borrowers who are struggling to repay because of the pandemic. The last date for banks to restructure the loans is December 31, 2020. But what does this restructuring of loans means? The borrowers have to make a fixed payment against the loans issued to them. The restructuring of loans’ plans will help them on a few of these criteria:

  • Reschedule their loan payment
  • Lower interest rates on their existing loans
  • A limited loan repayment holiday
  • Possible loan moratorium to a maximum of 6 months

All banks and non-banks including small finance banks, Local Area Banks, NBFCs, housing finance companies and all the other Indian financial institutions can help their borrowers by restructuring their loans.

The eligibility criteria

Those borrowers who were making repayments for their loan in less than the 30 days after the repayment deadline as of 1st March 2020 are eligible for the benefit. Financial services providers and MSME borrowers who have total loans outstanding of less than Rs 25 crore are not eligible.

For corporate borrowers, banks have to come out with a restructuring plan before the start of 2021. They will have a 6-month time period, till June 30, 2021, to implement it. When it comes to personal loans, the banks have the same duration to invoke a new plan but will have only 90 days to implement it. If the banks fail to implement the resolution plan in the specified duration then no restructuring will be approved and the banks will be forced to set aside higher provisions.

Impact on Banks

Banks are the central figure of this resolution plan. The restructuring plan will help in keeping things static but what implications will it have on medium and long-term in still to be seen. With this in mind, RBI has asked banks to maintain additional 10% provisions against post-resolution debt.

As loan moratorium is not extended for the first time since March, banks will get a better picture of how much their NPAs has risen. With this new move, banks do not have to count every default as an NPA. Thus, saving themselves from a lower bottom line in their Profit and Loss statement. During the revival window, if the borrower can get his business running, he will be paying the loan accrued back. Hence, benefitting all parties.

Is everyone better off?

Restructuring of loan is a win-win situation for both banks and the borrowers but not so much for the economy as a whole. By not naming defaulters, banks do not have to keep higher provisions. When the banks are forced to keep high provisions due to NPAs, their losses mounts. This loss leads to negative emotions among the investors in the stock market which further drives down the bank’s market value. As borrowers are not termed as defaulters, their credit score is not impacted and they can avail loan from other banks. For the general public, their deposits are at risk as banks are giving out its depositor’s money to people who may not pay under the it back under the name of moratorium.

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