The reserve Bank of India Exemption from loan EMI repayment completed.

Reserve Bank of India ends loan repayment moratorium, unveils restructuring plan

The Reserve Bank of India ended the loan repayment moratorium and unveiled a loan-restructuring programme as a first step toward nudging industry and banks to return to normalcy, while keeping interest rates unchanged, balancing the need to shore up the Covid-hit economy with inflation vigilance.

The Reserve Bank of India today said it would allow lenders to restructure loans of borrowers who are struggling to repay because of the fallout of the COVID pandemic.

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Announcing a review on monetary and credit policies on Thursday, RBI Governor Shaktikanta Das said a window under the June 7 stressed asset resolution framework will be provided which will enable lenders to implement a resolution plan, without a change in ownership.

What is the decision of RBI?

• The economy has slowed down due to the corona virus. In such a situation, recovery of loans given by banks is difficult. With this in mind, many borrowers are unable to repay their loans on time even if they want to. They needed relief.
• In such a scenario, the RBI announced a moratorium on EMI on all term loans from March 1 to May 31, 2020 in March 2020. That is, if you do not pay the installment, your credit score will not be affected.
• This was later extended to three months until August 31, 2020. No increase was announced in the monetary policy on Thursday. That is, the mortuary plan is closed.
• This simply means that from September you will have to pay installments on your home loan, vehicle loan and personal loan as before March. Credit score will be affected if payment is not made.
• Banks also sought permission for loan restructuring. The RBI has approved it. Now, banks can change the loan repayment schedule of their loan holders, extend the period or give payment holiday.

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What effect will loan restructuring have on consumers?

• The Reserve Bank has allowed all banks to restructure loans. It mentions personal loans, no separate provision for home loans, vehicle loans and other loans.
• If you are unable to repay a home loan or vehicle loan even after the moratorium has expired, you will need to contact your bank or financial institution. It can restructure loans on a case-by-case basis.
• According to Shalini Gupta, chief strategy officer of Myloncare, the restructuring has been approved. But who will benefit from it, only the banks will decide.
• Experts say the RBI has set provisions for MSME and corporate loans as well as personal loans. The Reserve Bank should also clarify what will happen to home loans and vehicle loans.
• However, the RBI has allowed restructuring of loans only to borrowers who do not have a default of more than 30 days as on March 1, 2020.
• Old defaulters will not be accommodated in this plan. Banks will have to make additional provisions on outstanding debts after recovery. This means that the resolution plan will be for new defaulters only.

What is the difference between EMI moratorium and loan restructuring?

• Exemption from paying EMI under moratorium. In the meantime, the interest accrued is added to the bank principal amount. You will have to pay interest on that amount when the EMI resumes. That is why interest rises on interest.
• Loan restructuring is different. Banks get more rights in it. Banks can decide whether to reduce EMI, increase the loan period, charge interest or adjust interest rates.

How will restructuring be done in personal loan?

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• The RBI has also approved one-time restructuring in personal loans. However, banks or financial institutions will not be able to restructure retail loans to their own staff.
• This account should be standard by March 1, 2020. It should not have a default of more than 30 days.
• If you are unable to pay the personal loan installment, then you can apply for restructuring before 31st December. Banks will have to decide on these applications within 90 days.
• Banks and financial institutions will be able to extend the loan repayment period up to a maximum of two years. They will be able to make decisions based on the person's income.

SME loan restructuring

• The RBI has also allowed one-time restructuring to micro, small and medium enterprises. The scheme will be available to MSMEs with outstanding loans up to Rs 25 crore.
• The loan restructuring of MSMEs should be done before March 31, 2021, the RBI said. Under these guidelines, an additional 5% provision has to be made for accounts on loan restructuring.
• The one-time restructuring plan was announced in January 2019. It was later extended in February 2020. Now MSME has been expanded to provide additional benefits due to Corona virus.

How will corporate loans be restructured?

• Banks can implement the scheme by December 31, 2020. If the borrower submits to the bank, the banks have to submit the solution within 180 days.
• Before restructuring, banks and financial institutions will have to provide an additional 10% of the total debt. If the inter-credit agreement is not made within 30 days, an additional provision of 20% will have to be made.
• M.V. A committee has been formed under the leadership of Katham which will set a specific area benchmark for the resolution plan. The committee will also decide on a resolution plan for a loan of Rs 1,500 crore or more.
• In cases where the total loan is Rs. 100 crore, banks will have to evaluate the credit of the resolution scheme from an accredited credit rating agency.

RBI said banks can restructure loans of borrowers who are facing cash crunch and are unable to repay them

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The resolution of stressed personal loans will be available to borrowers who were repaying their loans regularly as on 1 March 2020

The restructuring will enable borrowers to reschedule their loan payment, or get a limited loan repayment holiday, or lower interest rates on their existing loans depending on the agreement they reach with their bank.

Even before the RBI announcement, banks could have changed the loan repayment terms for their borrowers. But in that case, they would first have to declare the borrower a defaulter, and set aside more money from their profits to cover for potential risk of the loan never being repaid. Now, with RBI’s new rules on loan restructuring, banks have been given some relaxations, and so will be open to granting this relief to genuinely impacted borrowers.

On Thursday, Mint reported that the finance ministry had started work on setting up of new DFI -- a government-backed specialized institution to offer funds to borrowers who are unable to get it from commercial lenders -- which is likely to be finalized and set up in the next six months.