The coronavirus pandemic has had a widespread impact on the economy, leading to job losses and income disruptions. This has in turn impacted the repayment capacity of a significant section of borrowers. With the six-month moratorium now over, banks and other lenders are expected to announce their restructuring plans for borrowers who are currently financially stressed due to COVID-19.
This is the first time that RBI has announced a restructuring framework for personal loan segments. The term ‘personal loan’ here includes education, home, gold, unsecured personal, car and consumer durable loans, apart from credit card dues and loan against securities (other than those sanctioned for business and commercial purposes).
Eligibility and options for impacted borrowers
The RBI's restructuring plan is unique on several counts. Unlike the earlier restructuring facilities offered to non-personal loan segments, this one comes with a clearly defined cut-off date and timeline for implementing the loan restructuring plans. Only those loans that were standard as on March 1, 2020 would be eligible for loan restructuring. This criterion is clearly aimed at weeding out loans that were already sick due to factors other than the COVID-19 pandemic.
What this means is that only those borrowers whose income and repayment capacity have been impacted significantly due to COVID-led factors would be eligible for restructuring plans. The objective is to cover retail borrowers – who otherwise had a good repayment history prior to the pandemic – left vulnerable by the COVID-19 crisis,.
Two of the biggest lenders in India, SBI and HDFC Bank, have rolled out their loan restructuring plans for COVID-stressed borrowers. Other lenders are expected to follow them soon.
The broader restructuring framework announced by the RBI allows lenders to resolve stress in the personal loan segments through rescheduling of loan repayments, conversion of interest accrued or to be accrued into another loan facility and through granting a loan moratorium of up to two years.
For example, SBI has allowed its borrowers in the personal loan segment to choose between a moratorium of up to 24 months and rescheduling of repayment installments and extension of loan tenure of up to 24 months. On the other hand, HDFC Bank has given a single option of tenure extension of up to 24 months to its personal loan segment borrowers.
Hence, those looking to take the loan restructuring facility would have to wait for the finer details to come from their respective lenders and then evaluate their options accordingly.
Implications of loan restructuring
Before taking any decision, borrowers should consider and be aware of the cost of opting for loan restructuring, which may become significant in the long term. For instance, SBI would charge an additional interest of 35 bps over and above the interest rate applicable for the rest of the tenure for availing the loan recast facility. Other lenders are also expected to charge fees and/or additional interest to partially or fully recover their cost incurred in maintaining additional provisions for restructured loans.
Apart from the monetary costs involved, borrowers availing the loan recast facility may also face an adverse impact on their ability to borrow in the near future. Restructuring of loans would be reflected in the borrower’s credit report and while it remains to be seen if it will have an impact on the credit score, it will definitely impact the eligibility for future loans. In the current environment, lenders are looking to give out loans to only low-risk segments whose income has remained largely unaffected by the pandemic. Hence, those who opt for loan restructuring would be considered ‘risky’ and not be looked at by lenders favorably in the near future.
This norm is expected to continue till the lending industry witnesses a clear revival in incomes and economic growth.
Hence, those who decide to apply for loan restructuring should do so only if their repayment capacity has been significantly impacted and are left without a choice. These stressed borrowers should, however, aim for faster repayment of their accumulated dues to the extent possible. They should also choose their moratorium period or rescheduled tenure primarily on the basis of the time expected for normalization of their incomes and cash flows. In case their incomes and cash flows stabilize earlier than expected, they should start making loan repayments or prepayments to the extent possible to reduce their incremental interest cost.
Is loan restructuring really a long-term solution?
According to the RBI, the moratorium that ended in August was more of a temporary fix, allowing borrowers impacted by the lockdown to defer their EMIs and credit card dues. As per the Financial Stability Report published by the RBI in July, about 50 per cent of the individual loan borrowers had availed loan moratorium as on April 30, 2020.
The widespread stress caused to the broader Indian economy required a more targeted and long-term approach for solving the liquidity and viability related issues faced by the existing borrowers.
Lenders too were fearing a considerable increase in their NPAs after the end of the loan moratorium period in August. Slower-than-expected unlocking of the economy may have further accentuated the fear of an impending economic shock. With the implementation of the restructuring plan, the lending industry too should get some relief by being able to spread the probable systemic shock over a longer period of time.
However, its success will primarily depend on how well the lenders implement it and how fast our economic activities and consumer demand regain their pre-COVID levels. The slower the pace of income and economic restorations, the longer would be the pain for the COVID-stressed borrowers.
The regulator and the government should also take adequate steps to capitalize PSU banks so that they can focus more on providing relief to deserving beneficiaries rather than worry about breaching their capital thresholds due to possible NPA spikes.(The writer is CEO & Co-founder, Paisabazaar.com)