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Why loan restructuring is a welcome move from RBI, and what govt now needs to do for borrowers

RBI has accepted bankers’ demand for one-time loan restructuring instead of extending the moratorium as a way of countering the impact of the Covid-19 pandemic.

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The Reserve Bank of India, in its latest statement on developmental and regulatory policies, announced a scheme for one-time restructuring of loans to help borrowers manage the stress caused by the Covid-19 pandemic. The restructuring of loans has been allowed for retail, MSME and corporate loans.

The intent of the scheme is to help those borrowers who were on track to repay loans but are unable to because of the adverse impact of the Covid-19 lockdown on their businesses. A number of checks and balances have been introduced to prevent a repeat of the previous episodes of loan restructuring, which did not succeed in addressing the NPA crisis but instead led to a widespread strategy of ‘extend and pretend’, where banks kept on extending fresh loans to ailing companies, even as they struggled to repay old debts.

For corporates, the scheme is applicable to only those borrower accounts which were classified as standard, and not in default for more than 30 days, as on 1 March 2020. The invocation of restructuring has to be implemented by 31 December 2020. A host of disclosure requirements have been laid out for banks, and for big loans, an expert commitee has been set up to undertake process validation of loan restructuring.

Also read: Why Modi govt has made a good call to move out of all non-strategic sectors

A needed move

The move to announce a one-time restructuring of loans was needed to support the firms adversely impacted by the Covid-19 pandemic. The RBI had earlier announced an across-the-board moratorium for six months, from 1 March 2020 to 31 August 2020, for borrowers.

But bankers, of late, had said the moratorium should not be extended, and they should be given greater flexibility to recast their loans where necessary.

Loan restructuring intends to provide flexibility to banks, and was needed as there is a risk of banks’ NPAs rising by alarming proportions by the end of the year. According to the RBI’s Financial Stability Report, the banks’ NPAs, which, until now, were showing a declining trend, are estimated to rise to 12.5 per cent by March, 2021. If the economic environment worsens further, the NPAs are estimated to rise to 14.7 per cent.

A recent study estimates that debt worth Rs 3 lakh crore is at risk of slipping into NPAs due to Covid-19, unless restructured by banks. A scheme that will allow banks to not classify the non-repayment of loans as NPAs under certain conditions would provide relief to them.

Non-financial firms

The financial performance of the non-financial listed firms presents a worrying picture.

While sales of non-financial firms have been contracting since September 2019, the magnitude of contraction saw a spike of 37 per cent in the April-June quarter, the first since the lockdown was imposed. The after-tax profit of such firms decelerated to 92 per cent in the April-June quarter, suggesting that their financial performance had been adversely impacted by the lockdown.

Measures to support businesses in these troubled times are necessary, as this is not the consequence of owners’ or managers’ decisions, but a pandemic. Guaranteed loans to MSMEs, loan moratorium and now one-time restructuring of loans are steps to ease pain of both lenders and borrowers.

Also read: Why India has increased economic freedoms in response to Covid, unlike Europe & US

Benefit for borrowers

A loan restructuring scheme helps borrowers to the extent that they can delay repayment of interest and principal amount, or repay loans at easy terms and conditions. These measures help address their immediate revenue losses.

However, as the RBI’s Financial Stability Report points out, sectors such as tourism, hospitality and aviation have been most adversely impacted due to the Covid-19 pandemic. These are sectors whose prospects depend on discretionary consumption spending.

The latest round of RBI’s consumer confidence survey indicates that most respondents do not expect to increase non-essential spending in the coming year as well. This shows that the recovery prospects of these sectors are bleak in the next few months.

Unless demand picks up, their ability to repay loans would remain impaired. A loan recast scheme would not be enough for them.

The government now needs to prepare a plan on how to address the issue of their loans and defaults in the coming months.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.

Also read: How Modi govt’s ordinance on cooperative banks can prevent PMC-like scams, protect depositors


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  1. Why is someone threatening suicides here failing extension of moratorium? If thee is restructuring, start with the poor first. In 2008 when govt announced relief against NPAs due to global meltdown, the businesses took the country on a royal ride. The poor will not take any discrimination lying down.

  2. Moratorium period must be extended till 31 December because I belong to education sector in which related people still facing problems.

  3. Modi government must extend the moratorium till December. Modi is saying sab ka khayal rakhte hain shoot bolta hai. Khana ka paisa poora nahi hota , ghar ka bhada baaki hai, bijli bill baki hai, school fees baki hai, bahut diktat hai. AB EMI KAHAAN SE DENGE. BAJAJ FINANCE KA AGENT AUR GUNDA PHONE KARKE PARESAAN KAREGA,DHAMKI DEGA, BOLEGA PAISA JAISE BHI DO, GHAR MAIN GHUSEGA . MERA personal loan ka moratorium December tak Milan chahiye, sare loan ko moratorium milne chahiye. Nahin to main suicide karungi. Modi government se hamari biswas uthjayagi

  4. Moratorium must be extended otherwise I think that there will be number of cases of suicide .
    Please take the matter seriously.

  5. A needed move? seriously? this pathetic print media is obviously has no idea which state India is in!
    Even in Moratorium period, banks are calling daily and harassing,
    Now this incompetent and illiterate government directly handed the situation to banks, GOD only know, how many will be dead not by COVID but by harassment from banks.

  6. Oviously.. Every one should get the moritorium because..if banks to give the moritorium to selected candidates.. Then the left candidates will get pressure alot from collection agents though the company dont know where the consumer is in a postion to pay or not..personally if the person will not get the moritorium then the has to be suicided.. In the lock down period only people are getting many many calls from collection departments to reach there targets they are telling many stories to get payment forecfully from the customers who are mostly not educated and dont have any information… Any ways customers who has the amount anyways they pay in time or after wards through paymentink to avoid the additional charges in this i request kindly allow moritorium for every customer to all the small and large loans and others payments like credit card… As per there request…please.. Thank you…

  7. Moratorium must be extended till December otherwise we will be very badly hit. In case of cheque bounce bajaj finance company ‘s agents will call time and again, harass, intimidate, threat and demand the money. Their recovery agents will forcibly enter the house and will use filthy and uncivilized languages and threat to face dire consequences.

  8. Any extension on moratorium after 31st August for loan against property costumers, zero income madam kindly support us for getting moratorium new loans in this financial crisis, period should be extended till December 2020…

  9. Since people are jobless,no bussiness is there How the people will pay emi so the moratorium should extend up to atleast December 2020.

  10. The Govt. should stand with the people, they should know the the situation of the citizens during this pandamic and extend the moratorium until December, many lost their jobs, business are down, no money for food with people. How can bank say no to moratorium and the Govt. and RBI accept it. The Govt. and the RBI should take the decision and ask the banks to do and not let the banks decide and ask the Govt. and the RBI to do for them.

  11. I just want to say that I don’t have job right now how can I pay my EMI and I am on rent land lord said pay my rent school asking pay my fees I am a school teacher and school said I have no money to pay salary a big question for us???????????

    Who will solve our problems when govt ask pay EMI

  12. Once banks were adding the interests for all six/five moratorium months to the leftover principle amount then what were the losses to banks? Moratorium still can be extended instead of restructuring of loans only for perticular borrowers.
    Because job holder borrowers became jobless more in the context of covid19 than bussiness-man borrowers.

  13. Some state lock down still going on
    we lost job ,business no money how to pay EMI , need
    Extend Moratorium central govt. plz helpWe us.

    • The cruise industry is very hard on us no salary from the past 6 months how am I supposed to pay my emi the bank people don’t have a heart they keep torturing you with phone calls so what is the government doing about it

  14. But that’s mean we have to pay interest in all case pls cut the roi at least half of it in moraturium period

  15. No buisness no job how middle class will pay EMI
    I request government to extend moraorium til 31 st December 2020

  16. People are interested in moratorium3 not in restructuring of loans, why is the Narendra Modi government not coming to the rescue of the poor borrowers instead backing the banking sector leaving the poor helpless people at the beck and call and mercy of the banks. Is this why they have voted you all to power only to deceive and ditch them in this dufficult days where there are no jobs no salaries and their survival is at stake. With so many sectors still closed down and the lockdown still in place where do they get respite.

  17. No work no business no money no food pay EMI?
    Please moratorium December month ending
    No moratorium no pay EMI npa
    number of browsers defaulters cibl block list
    A big bloom financial sector
    Please moratorium next 4 months
    No activity bussiness moment

  18. Banks are already doing the economic heavy lifting in COVID crisis. Now restructuring of large borrowal loans , with blessings by experts like you , is coming . Madam , as a Bank depositor , I am worried on whether FRDI will come back again ? Whether Bank Depositors will be holding all these babies ultimately ?

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