What is Restructuring?

RBI recently announced to open a restructuring window for stressed loans. Those accounts which had been in default for not more than 30 days as on March 1, 2020, can be restructured if the borrowers are unable to service them because of their businesses being affected by the Covid-19 pandemic. 

RBI has decided to constitute a committee to workout the details.

What is Restructuring?

Restructuring is changing the terms of the loan to make it easier for borrowers to repay the loan. Loan can be restructured by reducing the rates, giving more time for borrowers to pay up, Converting debt into equity among others.

Why was it required?

Due to the Covid lockdown led slowdown in the economy a lot of businesses and individuals are facing cash flow issues.They are finding it difficult to service their loans. Many of them in normal times could service their loans. RBI had introduced Moratorium for 3 months and then extended it once but decided not to extend it again. 

Read more about Moratorium here. Also why the Moratorium wasn’t extended – Read here.

One time restructuring is to help these kinds of businesses and individuals.

Provision for Banks:

Banks need to keep aside 10% of exposure as provision for restructured loans. Banks can keep restructured loans as standard assets. (Which in layman terms would mean normal loan in the Bank’s book)

Relief for Banks too:

Had RBI not allowed this one time restructuring and with no moratorium, banks would have been forced to restructure it with older norms or recognise many as non-performing assets. 

This would have resulted in Banks having to either make a higher provision or book a loss. This would have eroded their capital. This is particularly important as many banks are not adequately capitalised.

A large deluge of Non Performing assets would have created problems for the Banking sector. Once the lockdown is completely lifted and the economy starts coming back to normalcy, it is expected that many of these businesses and individuals should be able to service their loans.

Covid Pandemic led slowdown is an outlier event and policy makers will have to address the issues arising out of it.

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