Loan Moratorium out, Loan Resolution In

The Loan Moratorium ended on August 31, 2020. While I have written about various measures to manage cashflow stress beyond August 31, let’s explore the relief that RBI has afforded to individual borrowers in a circular issued in August 2020. On August 6, 2020, the RBI provided a framework for Resolution of COVID 19-related stress. RBI suspects that the non-performing assets may rise once the moratorium period gets over. The extant regulations require lenders to write off or make provisions for such non-performing assets. This erodes lenders’ capital/equity. The erosion of equity makes lenders vulnerable and compromises their lending ability. Since the entire system is interconnected, the failure of even a single lender can turn into a big crisis for the entire financial system.



To prevent this, RBI has provided a window to banks/NBFCs/HFCs to restructure the loans. Restructuring of a loan can include changing principal repayment structure, lowering interest rate or even granting a moratorium on the loan. By the way, loan restructuring is not uncommon. Happens all the time. However, the banks usually have to take a much bigger hit (higher provisions) when they restructure loans. With the window for resolution, this hit will be much smaller.

All this has been done to ensure that loan accounts do not slip into the NPA category. While the target is to prevent damage to financial institutions, the damage to banks cannot be prevented without providing relief to end-borrowers. While the RBI has provided relief under this Resolution framework to all types of borrowers, I will focus on only the individual borrowers. Even though it is NOT as simple to understand as a loan moratorium, a better understanding of this relief will help you start discussion with your bank.

Who Is Eligible for Loan Resolution?

Only loan accounts that were regular (not in default for more than 30 days) as on March 1, 2020 will be eligible for resolution. Since the intent is to provide relief on loans that are in trouble only due to Covid-19, the central bank has set the cut-off date as March 1, 2020. Credit facilities provided by the lenders to their own employees will not be eligible for resolution. I do not understand the rationale behind this.

Points to Note

The bank retains the discretion. It may or may not allow restructuring for your loan. The resolution under the framework can be invoked no later than December 31, 2020 and the implementation must be completed within 90 days of invocation. The date of invocation shall be the date when the lender and the borrower have agreed to a resolution plan.

The implementation of the plan shall be deemed to be complete when all the documentation/agreement pertaining to revised repayment terms is complete. By the way, for the account to remain standard, the borrower must NOT be in default as per the revised terms as on the date of implementation.

The eligible borrowers’ accounts should continue to be classified as Standard till the date of invocation of resolution under this framework. From the lenders’ perspective, this helps banks to avoid reporting this as an NPA, which reduces provisions and helps support their equity base. From the borrower’s perspective, I am not sure how the banks will report non-payments to credit bureaus (until the resolution plan is implemented). Unlike EMI moratorium, there seems no explicit protection from damage to credit score.

What Will the Resolution Plan Look Like?

The resolution plan will provide relief in loan payments. Unless that happens, there is nothing in this for the borrower. Hence, the relief may be in the form of rescheduling of payments, conversion of accrued interest (or be accrued) into another credit facility or a moratorium. However, the moratorium can be for a maximum of 2 years.

The RBI circular is silent on whether the moratorium can be on both principal and interest payment or just the principal repayment. Usually, moratorium does not extend to principal repayment. However, I am not sure about this. As I see, the RBI has left many things to the bank. And the bank seems to have the freedom to provide relief in whichever way it wants. For instance, the bank could suggest a step-up principal repayment (you repay lesser principal in the initial years and more in the later years) or balloon repayment. Or you could have a lower interest rate for a few months/years and a higher rate of interest later. Or yet another moratorium. Or it could be a mix of all the above methods. By the way, the lenders have the freedom to deny relief too.

How Do You Approach This?

In my opinion, this should be your last resort. While resolution will provide immediate relief, this is likely to be a bad deal over the long term. The resolution plans are structured that way. Unless you are a big corporate borrower, the banks don’t let you go easily.

If you must, you can approach your bank for resolution within this window. There is nothing on bank websites about this resolution plan for individual borrowers. Perhaps, the lenders want to get a sense of the default situation before moving ahead. Each bank may approach this in a different way (or provide relief in a different manner). You will find out when you reach out to the bank.



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