Banks expect a rush to recast retail loans post lockdown

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Banks await a rush of retail borrowers wanting to recast their loans under the renewed one-time restructuring window. The Reserve Bank of India (RBI) reopened the debt restructuring scheme on May 5 as the country reeled under the impact of the second wave of the Covid-19 pandemic.

“The ongoing lockdown conditions have disrupted banking operations in several states. Given the disruption in monthly earnings of several individuals and small businessmen, we expect a rush soon after the lockdown is lifted,” said a banker. He however hoped that the number may not be as high as last year’s.

Retail borrowers and small businesses are being permitted to recast their loans, without being slipped into the non-performing asset category. The one-time restructuring is available for borrowers having an outstanding of loans up to Rs 25 crore. Borrowers have time till September 30 to approach their lenders for the recast. The facility is open to consumer credit, education loan, loans given for creation or enhancement of immovable assets such as housing, and loans for investment in financial assets such as shares and debentures, among others.

The rush of customers is likely to begin only after the existing lockdown conditions are relaxed and individual borrowers assessed their loan-repaying capacity post the lockdown. Retail borrowers will be keen to avoid defaults on loan repayments since it increases the cost of the loan and worsens their credit score.

“Under the revised scheme, customers have not started approaching the bank en masse. So far, we have received requests for restructuring worth only around Rs 100 crore. Even in 2021, this was the case. The customers came to the bank with a request for restructuring a little later,” said a senior Federal Bank official.

The private bank, which ended up restructuring Rs 1,409 crore worth of loans during the last financial year with Rs 959 crore being retail loans, said it is yet to see a flurry of action.

In the last fiscal, more than half of the total loans recast under the RBI’s one-time debt restructuring scheme were retail loans, as per the numbers revealed by various banks so far. HDFC Bank, ICICI Bank and Axis Bank collectively implemented retail debt recasts of Rs 6,603 crore, with more than Rs 4,000 crore of retail loans and remaining corporate loans. While HDFC Bank restructured retail loans worth Rs 5,456 crore while Axis Bank Rs 504 crore of retail loans.

On Tuesday (May 18), Canara Bank said it has extended restructuring to 15,395 loan accounts having a loan exposure of Rs 1,206 crore. Of this, 5,228 were personal loans amounting to Rs 636 crore.

Under the scheme, restructuring may include rescheduling of payments, conversion of any interest accrued or to be accrued into another credit facility, revisions in working capital sanctions and granting of moratorium to help the borrower steady his earnings before start the repayment cycle.

The central bank has asked lending institutions to frame board-approved policies and publicise it sufficiently including on their websites in an easily accessible manner. Further, they have to ensure that the resolution under this facility is provided only to the borrowers having stress on account of the pandemic. Compromise settlements are not permitted under the plan. The moratorium period, if granted, may be for a maximum of two years, and will come into force immediately upon implementation of the resolution plan. The extension of the residual tenor of the loan facilities may also be granted to borrowers, with or without payment moratorium. The overall cap on extension of residual tenor, inclusive of moratorium period if any permitted, will be two years.

The RBI said the Resolution Framework 2.0 is open to borrowers that are individuals and micro, small and medium enterprises (MSMEs), who have not availed restructuring under any of the earlier frameworks, including the Resolution Framework 1.0 of RBI dated August 6, 2020, and who are classified as standard as on March 31, 2021.

In case of the individual borrowers and small businesses who have availed restructuring of their loans under Resolution Framework 1.0, where the resolution plan permitted moratorium of less than two years, lending institutions have been permitted to use the window to modify their plans to the extent of increasing the period of moratorium and/or extending the residual tenor up to a total of two years, as per the RBI governor.

The banks had sought a reopening of the restructuring window as they sensed another round of defaults as the economy reeled under the second wave of the pandemic.