NEW DELHI: With the Reserve Bank of India (RBI) expected to come up with a one-time loan restructuring by August first week to help businesses bogged down by the Covid-19 pandemic, the finance ministry has proposed a time-frame for loans to be eligible for the scheme.
According to informed sources, the ministry is in favour of allowing loans taken up to six months before the lockdown to be restructured by banks.The proposal will be sent to the banking regulator for taking the final call.
“In the last meeting, RBI wanted loan restructuring to exclude already stressed sectors such as real estate, telecom and power to avoid misuse of the restructuring scheme. One solution discussed was to narrow down the timeframe of loans,” a senior official from the finance ministry said, who was part of the discussion with RBI, told TNIE.
According to the ministry’s proposal, the scheme will cover loans from companies that have defaulted between October 2019 and December 2020 and such accounts will continue as standard accounts, the official explained.
While the timeframe may exclude some businesses, the official claimed it will include sectors that have been directly impacted by the pandemic such as travel, hospitality, large manufacturing, consumer goods, and aviation.
However, all this is subject to the central bank’s approval.The one-time restructuring will also exclude MSMEs, for which the Centre has announced separate schemes.According to sources, RBI is cautious about one-time restructuring because of its past experience with such plans.
During the 2008 crisis, RBI had offered similar restructuring but it led to shooting up of non-performing assets.According to a recent study by CLSA, 70% of restructuring during the FY08-FY18 decade turned NPAs and only 25-30% recovered to standard loans.
“We believe a 1-2 year repayment period extensions rather than deep restructuring as in the last cycle would help balance the interests of borrowers and shareholders,” the CLSA report had added.
This is the reason the RBI wanted to restrict the timeframe of loan restructuring.
Why banks want it
Restructuring allows banks to modify the terms of loans such as repayment period, repayable amount, number of instalments, or rate of interest to help borrowers undergoing financial stress