Monday, April 22, 2024
Home > Finance News > How does a bank restructure a loan? A banker explains RBI’s spiel

How does a bank restructure a loan? A banker explains RBI’s spiel


The RBI on Thursday gave lenders the power to recast loans to pump prime an economy staring at its first annual contraction in more than four decades. The one-time restructuring of loans, announced by governor Shaktikanta Das, lets banks reschedule agreements with borrowers who were on track to repay their loans on March 1, a time when the world was still struggling to decipher the virus.

As per experts, RBI is yet to clarify on the type of personal loans that are eligible under this recast that aims to cushion the pandemic‘s blow on struggling businesses and households.

Veteran banker Sanjay Thakur, who heads strategy at one of India’s leading private lenders, helped us decode this financial spiel. Edited excerpts.

What is loan restructuring?

Loan/debt restructuring in simple terms refers to changing existing loan contract terms for the borrower. This is to facilitate managing of loan principal (initial size of the loan) and interest obligation due to the lender, which is the bank or NBFC.

What does this process involve?

Restructuring may involve either extension of the loan repayment period or modification of interest obligation frequency under mutually agreed terms, based on an assessment of each case. Restructuring is an extreme option taken when the borrower is at risk of default due to reasons such as Covid-19, or any other factors that can lead to severe demand and supply chain disruption.

Let’s say a borrower has to pay the bank Rs 1,00,000 over three years, with interest payment of 4% per annum. But it seems like the borrower might default. In what ways can a bank restructure this loan?

The loan tenure can be increased to five years with the same rate of interest to reduce monthly liability for repayment post assessment to protect the borrower, and hence also protecting assets of the lender. The borrower gets more time to revive their business or get outside debt or equity to pay off the loan liability.

How is this different from EMI restructuring?

EMI restructuring is nothing but an extension of loan tenure to reduce and ease the monthly repayment obligation of the borrower.

What does RBI mean by ‘one-time’ loan restructuring?

It is called ‘one time’ because there is a timeline with defined terms and conditions for eligibility for restructuring of corporates, MSMEs and personal loans.

On what basis does restructuring differ for individual cases?

The basic difference is in the invocation of resolution plan, which can be done any time before December 31, 2020 and will have to be implemented within 90 days of invocation for an individual, as against 180 days of invocation for non-individuals or companies/business.

What is the best-case scenario for banks and borrowers?

Best case for the lender is to be able to protect the portfolio from going bad, which under the new restructuring guideline means lower provisioning. Hence banks get a positive impact on the P&L. The borrower, on the other hand, gets a two-year convenient window to revive their business or get additional funding from outside which can be convertible debt or equity to the repay loan. The repayment term is being made easier by restructuring payment obligations.


Source link

Leave a Reply

Your email address will not be published. Required fields are marked *