Shortpedia Blog

Loan Restructuring: A welcome move by RBI

1. The Reserve Bank of India, in its latest statement on developmental and regulatory policies, announced a scheme for a one-time restructuring of loans to help borrowers manage the stress caused by the Covid-19 pandemic.

2. The intent of the scheme is to help those borrowers who were on track to repay loans but are unable to because of the adverse impact of the Covid-19 lockdown on their businesses.

3. A number of checks and balances have been introduced to prevent a repeat of the previous episodes of loan restructuring, which did not succeed in addressing the NPA crisis but instead led to a widespread strategy of ‘extend and pretend’, where banks kept on extending fresh loans to ailing companies, even as they struggled to repay old debts.

4. For corporates, the scheme is applicable to only those borrower accounts which were classified as standard, and not in default for more than 30 days, as on 1 March 2020. The invocation of restructuring has to be implemented by 31 December 2020.

5. The move to announce a one-time restructuring of loans was needed to support the firms adversely impacted by the Covid-19 pandemic.

6. Loan restructuring intends to provide flexibility to banks and was needed as there is a risk of banks’ NPAs rising by alarming proportions by the end of the year.

7. According to the RBI’s Financial Stability Report, the banks’ NPAs, which, until now, were showing a declining trend, are estimated to rise to 12.5 percent by March 2021.