Impact Of One-time Loan Restructuring On Financial Lenders And Borrowers

Keeping in mind the financial losses that occurred to the people in the wake of the pandemic, the Reserve Bank of India introduced a one-time loan restructuring for lenders and borrowers. It has proved to be a big relief for businesses facing financial distress. Let us delve deeper into this financial scheme.

What Is One-time Loan Restructuring?

Under the scheme, the borrowers who faced financial difficulties due to COVID-19 including during lockdown, could renegotiate and make amends to their loan terms to revive the businesses and cash flows. Hence it would prevent the borrower from being listed as a defaulter in the bank and give them time to rearrange their finances. On top of that, the businesses can prevent their business from coming to a standstill by availing a one-time loan restructuring scheme.

The scheme has a strict entry barrier as compared to the previous loan restructuring schemes by the RBI. The people whose income sources have been adversely affected or are not able to pay their loan amount due to COVID-19 are only eligible for invoking the scheme.

Benefits of one-time loan restructuring

As per instructions from the RBI, a borrower can avail of any of the three options while opting for this scheme

• A principal repayment and interest payment moratorium tenure of up to two years
• Extension of the loan period to reduce the earlier EMI amount as per repayment schedule
• Combination of above with overall tenure not to exceed by two years

(It is to be noted in any case the tenure of loan can increase upto two years of the original repayment schedule. )

Another unique feature of the OTR scheme is that it is also applicable on loans drawn by individuals.

Main characteristics of the one-time loan restructuring Scheme:

• Certain lending institutions and categories of the borrowers are not eligible under the Scheme like MSME borrowers
• The Reference Date for the Scheme is March 1, 2020- the default should not exceed 30 days as on 1 March 2020.
• The Account to remain standard on as Invocation Date with all the lenders
• Invocation of the Scheme was to happen by December 31, 2020 and implememntation within 180 days of Invocation
• ICA mandatory for multiple lenders– within 30 days of invocation
• Restructuring proposal to meet financial parameters as defined by RBI (Circular dated Aug 6, 2020)
• Independent Credit Opinion  on the Resolution Plan for exposures Rs. 100 crore or more and Expert Committee Review of the Resolution Plan for exposures of Rs. 1500 crore or more
• The Account can become NPA after Invocation Date however on implementation of Resolution Plan, the account will be classified as Standard and lower provisions are required to be made in the books of lenders.