The Resolution Framework 2.0 is perhaps recognition that its predecessor may not have fully responded to the stress stemming from Covid, as suggested by the limited number of restructured retail accounts. Bankers have also recognized it.
The Reserve Bank of India (RBI) on Wednesday authorized lenders to carry out a new round of restructuring the accounts of small borrowers who failed to take advantage of the Covid stress overhaul program last year.
Individuals and small businesses with loans of up to Rs 25 crore that have never undergone restructuring before and that were classified as standard as of March 31, 2021, will be eligible for the new scheme, called Resolution Framework 2.0.
“The resurgence of the Covid-19 pandemic in India in recent weeks and the associated containment measures adopted at the local / regional levels have created new uncertainties and have had an impact on the nascent economic recovery that was taking shape. In this environment, the most vulnerable category of borrowers are individual borrowers, small businesses and MSMEs, ”RBI Governor Shaktikanta Das said in an unscheduled morning address.
Additional relief has been offered to borrowers whose accounts have already been restructured as of August 6, 2020. Loans to individuals and to micro, small and medium enterprises (MSMEs) for which the resolution plan authorized a moratorium of less than two years will now be eligible for an extension of the moratorium period. Alternatively, lenders could extend the remaining term up to a total of two years. In the specific case of MSMEs restructured previously, credit institutions were also authorized, as a one-off measure, to review the limits sanctioned by working capital, on the basis of a reassessment of the cycle and working capital margins. .
Lenders have said a new restructuring plan is expected. There was also a sense of relief that the proposed program was not general, like the moratorium.
Suresh Khatanhar, DMD, IDBI Bank, said the framework is timely, which will provide comfort for those affected by the upsurge in Covid cases. “It will be a structured and monitored program where specific gaps are filled,” Khatanhar said. He explained that restructuring is a more flexible option compared to the liquidity support backed by a credit guarantee offered last year. “The support here is not limited to 20%. They also made it possible to reassess the limits of working capital. The problems here can therefore be dealt with in a more comprehensive way, ”he said.
SS Mallikarjuna Rao, Managing Director and CEO of Punjab National Bank (PNB), said allowing a revaluation of the working capital cycle of MSMEs restructured earlier will help align the working capital cycle with the current business environment.
Some industry players have questioned whether two years would be enough for the most affected sectors to get back on their feet. Jyoti Prakash Gadia, Managing Partner of Resurgent India, said entities that extend their moratorium period under the overhaul program should restart operations by 2022 and start paying down payments after two years. “However, it is still uncertain whether the revival of negatively affected sectors such as hospitality, travel and tourism and recreation will take place within two years,” he said.
The Resolution Framework 2.0 is perhaps recognition that its predecessor may not have fully responded to the stress stemming from Covid, as suggested by the limited number of restructured retail accounts. Bankers have also recognized it.
In January, Sanjiv Chadha, managing director and CEO of Bank of Baroda (BoB), said retail borrowers made up a very small proportion of the bank’s restructured portfolio. “Therefore, we have not been able to cope with any stress that might exist, at least through the restructuring mode – which means that either person is going to start paying on time. [or]There is a good chance that some stress comes from NPAs (non-performing assets), ”he said.
Analysts called the latest measures more moderate compared to last year’s moratorium. Srikanth Vadlamani, Vice President – Senior Loan Officer, Financial Institutions Group, Moody’s Investors Service, said: “This measure (resolution framework 2.0) is much softer than the general loan moratorium granted last year. and the proportion of restructured loans will be lower. However, the need for this measure highlights the re-emergence of downside risks to the quality of banks’ assets. “
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