Even as second wave of Covid-19 is behaving purely as an extreme health emergency, consuming human lives at an alarming pace, its impact on the economy is yet again going to be the worst. Amid the ongoing mayhem when people are struggling solely to save their lives, households are once again facing heat on their domestic budgets. Just in the beginning of the second Covid-19 wave, millions of people have once again lost their jobs and millions are witnessing drastic drop in their incomes. A report by Azim Premji University reveals that the pandemic and eventual lockdowns have wreaked havoc on the economy and livelihoods. Around 230 million Indians have been pushed into poverty during the past year.
Anticipating yet another major disruption in economic activities, the Reserve Bank of India (RBI) on Wednesday dished out a relief plan for businesses with a hope to keep the economy afloat. It announced Resolution Framework 2.0 under which individuals and small businesses having exposure up to Rs 25 crore can opt for loan restructuring.
Precisely, the apex bank came out with another set of measures where it plans to inject more liquidity into the banking system so that banks are flushed with funds to lend to the businesses, particularly small and midsize entities which need it the most. At the same time, the package extends some relief to the banks in terms of classifying loans as non-performing.
Notably, the RBI feels that small businesses and financial entities at the grassroots levels are bearing the major brunt of the second wave of infections.
However, this is one-time loan restructuring scheme under which the loan would remain standard despite recast and banks would not have to make additional provision in such cases.
This is the second restructuring scheme announced by the apex bank in less than one year, with the first unveiled in August last year when the first COVID-19 wave had battered the Indian economy with contraction of 8 per cent during financial year ended March 31, 2021.
The RBI EMI moratorium on loan payments ended its six-month run on August 31, 2020. Thereafter, RBI had given the option to borrowers to approach the bank for further restructuring based on the RBI’s Restructuring guidelines issued in August 2020.
Meanwhile, in addition to loan restructuring scheme, the RBI governor Shaktikanta Das said the central bank will make available an on-tap liquidity window of Rs50,000 crore for supporting healthcare infrastructure and a special three-year special long-term repo operations of Rs10,000 crore for small finance banks.
What is the exact nature of relief announced by the RBI?
It is a loan restructuring option for the borrowers who are finding it difficult to repay loans on time. The facility will be available to individuals and small businesses who had availed the restructuring earlier and even for those who had not availed it earlier.
The RBI has identified individual borrowers, small businesses and micro, small and medium enterprises (MSMEs) as most vulnerable category of borrowers are in this environment.
Individuals who have availed of personal loans, loans for business purposes and small businesses, including those engaged in retail and wholesale trade, other than those classified as micro, small and medium enterprises, are also eligible for the relief in terms of loan restructuring under the scheme.
Restructuring under the scheme may be invoked up to September 30, 2021, and would have to be implemented within 90 days after invocation.
In respect of small businesses and MSMEs restructured earlier, the scheme allows banks to review the working capital sanctioned limits, based on a reassessment of the working capital cycle, margins, etc,
Here the borrowers have to understand that the relief does not grant any moratorium explicitly on loan repayments.
In the prevailing Covid-induced crisis, the liquidity crunch still persists in many sectors of the economy, thus impacting individual borrowers. All borrowers may not be in a sound financial position to pay the loan installments on time. So, this loan restructuring facility would help the borrowers to come out of the financial stress to a large extant. It would be in the fitness of things for such stressful borrowers to approach their respective banks to get their loans restructured.
Besides above measures, the RBI among other things announced to make available an on-tap liquidity window of Rs50,000 crore for supporting healthcare infrastructure.
Under the scheme, banks can provide fresh lending support to a wide range of entities, including vaccine manufactures, importers/suppliers of vaccines and priority medical devices; hospitals/dispensaries; pathology labs; manufacturers and suppliers of oxygen and ventilators; importers of vaccines and covid-related drugs; logistics firms and also patients for treatment.
All loans given under this scheme will classified as priority sector loans, till repayment or maturity. Banks can disburse these loans to borrowers directly or through intermediary financial entities regulated by the RBI.
Precisely, the banks are expected to create a covid loan book under the scheme.
What is loan restructuring and how it is different from moratorium?
In simpler terms, loan restructuring refers to changing existing loan contract terms for the borrower. It is a process which allows the firm (entity) or individual facing cash flow problems or financial distress to reduce and renegotiate its debt to improve or restore liquidity enabling continuity in business operations.
Precisely, it’s a way out for the banks to tide over Covid-induced difficult times of liquidity crunch. Some experts call the instrument restructuring as ‘antibiotic’ to overcome financial stress.
The process of restructuring may involve either extension of the loan repayment period or modification of interest obligation frequency under mutually agreed terms, based on an assessment of each case. Restructuring is an extreme option taken when the borrower is at risk of default due to reasons such as Covid-19.
Moratorium can be defined as a momentary deferment of payment of interest or principal. It can be termed as a loan holiday.
Moratorium relieves an individual or corporate entity from the immediate pressure of shelling out regular EMIs which are then transported to the later part of the loan tenure along with accrued interest on the unpaid EMIs during the holidays.
The concept of just shifting or transporting the EMI burden typically hurts borrowers with longer loan tenures as they will have a huge chunk of payments going towards interest and hence, it becomes a double whammy, reducing the usage of the scheme to only those who are in dire need and excluding the otherwise genuine and honest borrowers.
Who is mostly benefitted by this loan restructuring, banks or borrowers?
In a situation when borrowers are facing financial stress and are unable to fund their loan installments, banks face threat to their loan portfolio as loans can turn bad (non performing assets). The instrument of restructuring allows the banks to protect the loans from going bad, which means lower provisioning. This way, the profitability of banks is not hit.
As far as borrowers are concerned, borrowers would be getting a two-year convenient window to revive their businesses. The repayment schedule is being made easier by restructuring payment obligations.
So, it is a win-win situation for both the borrowers and the banks.
Meanwhile, if we look back at the global financial crisis of 2008, we find some lessons from the loan restructuring which was done by banks and financials institutions during that crisis period. Most of the restructured loans ultimately turned bad. Not only this, allegations of misuse and siphoning of the loan funds to foreign locations through restructuring route was reported. It’s notable that the term ‘restructured’ attached with a borrowers hurts their credit score and they face hurdles in availing future loans.