What is RBI’s Restructuring 2.0 all about?

In a bid to ease the pressure on asset quality for banks and provide relief to borrowers, the RBI has allowed one-time restructuring of loans.

Right from the 2008-09 restructuring window, to other restructuring schemes such as Corporate Debt Restructuring Scheme (CDR), Flexible Structuring under 5:25 scheme, Strategic Debt Restructuring Scheme (SDR), and Scheme for Sustainable Structuring of Stressed Assets (S4A) — past experience with such regulatory forbearances have been disappointing. Not only have these schemes failed in resolution of stressed assets, but have also led to evergreening of loans.

So will the RBI’s restructuring 2.0 be any different?

Firstly, there is little debate on the need for a one-time restructuring window at this juncture. While banks have granted six-month moratorium to borrowers (until August 31), the ongoing pandemic crisis suggests that the pain would continue for businesses and individuals over the next year.

Need of the hour

Hence a one-time restructuring was imperative for both borrowers and banks. This will ensure that banks can continue to provide support to businesses hit by Covid (which would otherwise have been classified as NPAs).

The question is, how do you ensure that past mistakes are avoided and banks’ stability is not compromised in the process? The RBI has constituted an expert committee which will put in place necessary caveats. While the details of this will be known in the coming months, for now let us look at the features that stand out in RBI’s new restructuring avatar.

‘Good’ accounts

The RBI has mandated that only those borrowers that were classified as ‘standard’, and not in default for more than 30 days with any bank as on March 1, 2020, will be eligible for restructuring.

This straightaway weeds out chronic defaulters or highly stressed accounts.

As of March 2020, 93.9 per cent of banks’ performing portfolios consist of accounts that have either zero dpd (days past due) or are SMA-0 (overdue 1-30 days), according to RBI’s FSR report. Of this, 47.4 per cent are rated AA and above and 26 per cent are investment grade (till A rating). This mitigates the risk of shocks going ahead.

Of course, what could be of slight concern is the fact that restructuring of personal loans — auto, credit card, housing, personal loans, education etc. — too is allowed this time around (only corporate borrowers in the past). This may require additional caveats.

Goldilocks provisioning

The key issue with the earlier schemes was the meagre provisioning requirement on restructured loans. This led to evergreening of loans. The RBI had first offered a regulatory dispensation in 2008-09, in the form of restructured loans. Here banks were allowed to treat such loans as ‘standard’ and make a lower provisioning of 5 per cent against the 15 per cent required for bad loans. As data in subsequent years showed, this tool was misused by banks to a large extent. While bad loans and restructured loans together constituted 5 per cent of loans for PSBs in 2008-09, it went to about 15-16 by 2014-15.

The RBI closed the restructuring window by fiscal 2015, but allowed banks to restructure loans under Strategic Debt Restructuring (SDR) and the 5:25 scheme (which also carried paltry provisions). In 2018, (through its Feb circular), the RBI withdrew the restructuring schemes and placed them under the RBI’s Prudential Framework for Resolution of Stressed Assets (revised subsequently).

Realising that it is imperative for banks to maintain adequate provisioning, the RBI under restructuring 2.0 has stated that while the accounts will remain ‘standard’, they will require minimum 10 per cent provisioning. This will ensure prudent provisioning and also leave enough incentive for banks to do restructuring (minimum NPA provisioning is 15 per cent).

Setting time limits

With a view to offering the leeway only for those businesses hit by Covid and to ensure a time-bound window, the RBI has mandated that the restructuring cannot be invoked later than December 31, 2020. In case of personal loans, the resolution has to be implemented within 90 days from the date of invocation, in other cases by 180 days.

There is also a limit on the extension of the tenure of the loan under the restructuring. Banks can extend the residual tenor of the loan (with or without payment moratorium), by a period not more than two years. This will ensure that banks do not end up kicking the can down the road indefinitely.

Reaching consensus

Getting everyone on board for resolution has been a key issue with resolution in the past (as evident in JLF). Under restructuring 2.0 the RBI has mandated consent of 75 per cent of lenders (by value). This is in line with the existing framework on resolution of stressed assets (though higher than 66 per cent under IBC). The leeway to keep the account as ‘standard’ and the unprecedented challenges faced by all lenders may lead to better consensus this time around.