Covid Vaccination To Borrowers-One Time Loan Restructuring From RBI

Introduction:

Ever since the onset of COVID-19 induced lock down in the country, businesses had come to a standstill. Sensing the severity of the issue, Government through RBI, announced several measures for coping up with the challenges. Major initiative was announcing of Moratorium option for Paying Interest and Principal due between 01.03.2020 and 31.08.2020.

While most of the businesses availed the option during first 3 months due to severe lockdown. Upon gradual unlocking by government, the proportion of borrowers opting for moratorium came down substantially.

Looking at the improved situation,The Reserve Bank of India (RBI) ended the moratorium option by 31.08.2020 while providing another option of one-time restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the COVID- 19 pandemic. Bank boards have to formulate their own policies on the basis of guidelines issued by the RBI.

RBI Framework- Core Basis for the Proposal:

The disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board. A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This can potentially impact their long-term viability and pose significant financial stability risks if it becomes wide-spread. Accordingly, it has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures – without change in ownership – as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.

Key Features of the Scheme:

  • Restructuring scheme is only available to borrowers which are facing stress on account of Covid-19. The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies and anybody corporate established by an act of parliament or state legislature.
  • The Reserve Bank of India will  form an  expert committee headed by former ICICI Bank CEO KV Kamath to suggest ways in which the restructuring will be implemented.
  • The Committee which is formed by the Central Bank will also vet proposals for restructuring of loans of Rs.1500 Crores and above.
  • Lending institutions have been asked to frame board approved policies to implement viable resolution plans for eligible borrowers under this framework.
  • The policies shall, detail the eligibility of borrowers and lay down the due diligence considerations to be followed by the lending institutions. March 1 has been set as the reference date for the outstanding amount of debt for restructuring.
  • The resolution plan also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt.  

Let us look at the salient Modalities of the Scheme:

                           
Who is Eligible?

Corporate persons:                 

Borrower accounts should be classified as standard and loan exposure of >25 Crores but not in default for more than 30 days with any lending institution as on March 1, 2020. Further, the accounts should continue to remain standard till the date of invocation of resolution under this framework.

•MSME:

MSMEs with outstanding debt worth up to Rs.25 Crore and their accounts with the concerned lender were classified as standard as on March 1, 2020 are eligible for restructuring scheme.

Is there any timelines for restructuring?

Yes, there are timelines for loan restructuring under the RBI Resolution Framework for COVID-19 related stress.

Corporate persons:                                                            

Resolution under this framework for corporate persons may be invoked not later than December 31, 2020 and must be implemented within 180 days from the date of invocation.

•MSME:

Restructuring plans for eligible MSME’s will have to be implemented before March 31, 2021.

What are my options for Restructuring?                                                                 

• Rescheduling of repayments by a maximum period of two years with or without a payment moratorium.

• Conversion of accrued interest in to another credit facility.

• Granting of Moratorium based on an assessment of income streams of the borrower, subject to maximum of 2 years.

• Modification of overall tenor of the loan.        

• Offering new loan facility.

What happens after 31.08.2020? Do I need to start paying again?

Yes. All non MSME Corporate borrowers shall start repaying even if they opt for restructuring. Account shall be standard when the restructuring to be implemented in bank records. While MSME borrowers to have their accounts in standard rating as of 01.03.2020.

Do I need to do Independent Credit Evaluation?

Resolution plans in respect of accounts where the aggregate exposure of the lending institutions at the time of invocation of the resolution process is `100 Crore and above, shall require an independent credit evaluation (ICE) by any one credit rating agency (CRA) authorized by the Reserve Bank under the Prudential Framework.

Is GST Registration is compulsory?

The borrowers must be GST registered in all cases where such registration is mandatory. However, this condition will not apply which are exempted from GST registration.

Is there any process for loan restructuring?

•Single lending Institutions:

Decision regarding the request for resolution by the borrower may be taken by the lending institution as per the Board approved policy of the institution and within the contours of this framework.

•Multiple lending Institutions:

60% of lenders by numbers and 75% of lenders by value of the total outstanding credit facilities (fund based as well non-fund based), must sign Inter Creditor Agreement (ICA) within 30 days of invocation. For this purpose, the date of invocation shall be the date on which both the borrower and lending institution have agreed to proceed with a resolution plan under this framework.

How to ensure that the Restructuring plan is implemented?

The resolution plan shall be deemed to be implemented only if all of the following conditions are met:

  • All related documentation, including execution of necessary agreements between lending institutions and borrower and collaterals provided, if any, are completed by the lenders concerned in consonance with the resolution plan being implemented.

  • Changes in the terms of conditions of the loans get duly reflected in the books of the lending institutions.

  • Borrower is not in default with the lending institution as per the revised term

What happens if there is any default after restructuring of loans?

In respect of exposures other than personal loans, any default by the borrower with any of the signatories to the ICA during the monitoring period will automatically lead to 30-day review period. Loans will be classified as NPA’s if 10 percent is not done during this period.

If the borrower is in default with any of the signatories to the ICA at the end of the Review Period, the asset classification of the borrower with all lending institutions, including those who did not sign the ICA, shall be downgraded to NPA from the date of implementation of the resolution plan or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.

Can I borrow additionally and avoid Restructuring?

Yes, you can borrow additional loan and avoid restructuring using the Emergency credit line or other sources of funds provided that the business viability and sustainability has not been seriously impacted.

Should I avail these facilities?

Once your business case has been revalidated with clear feasibility, capital infusion through further debt or equity can be considered. In the event of challenges on the same, the restructuring option shall be considered.  Since RBI has introduced this facility in order to help companies and individuals manage the financial stress caused by the COVID- 19 pandemic, it may not have a major impact on the credit profile of a borrower opting for restructuring.

What should I do for availing this facility?

Write a letter to a bank saying that you make use of this opportunity and seek their directions on the process of loan restructuring.

Is conversion of debt to equity is possible?

The resolution plan may provide for conversion of a portion of the debt into equity or other marketable or non-convertible debt securities issued by the borrower, provided the amortisation schedule and the coupon carried by such debt securities are similar to the terms of the debt held on the books of the lending institutions, post implementation of the resolution plan.

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