Restructuring of Loans: New RBI Guidelines on Loan Moratorium


12 Oct 2020 | 5 min read

The current uncertainty brought about by the COVID-19 is not limited to just the medical condition of people around the world but has also impacted the financial world. To provide some relief to borrowers, the Reserve Bank of India announced a 6-month loan moratorium from 1 March 2020 to 31st August 2020. 

When the moratorium period was on, there were varying voices on further extension of the tenure, levying of interest during the moratorium period, the overall financial instability it was causing. As the extension of the loan moratorium is pending with the Supreme Court, common borrowers are still uncertain.

Here is something that a borrower needs to know about the new RBI loan guidelines on loan moratorium and what your current options are.

The current status

While many are in favor of extending the moratorium till 31 December 2020, the Supreme Court has extended the interim order on a moratorium to 13 October 2020. However, the moratorium period has reached to a point where it is stemming the cash flow of banks and NBFCs, leading to instability and cash crunch. There has been a lot of confusion among borrowers and they have not been getting much benefit, with their interest liabilities getting compounded. However, the Centre proposes to waive compound interest during the moratorium, which is a major relief for borrows. 

RBI guidelines for EMI moratorium

Understanding the hardship brought about by the coronavirus pandemic, the RBI on its part has provided a one-time new debt resolution window to help borrowers without affecting the cash flow of the banks. 

The debt resolution plan is in compliance with the June 2019 prudential framework, which allows banks and NBFCs to implement a resolution plan. Under the facility, lenders can implement a one-time restructuring of loans under stress due to the COVID-19 crisis. The restructuring plan had been extended to personal loans as the borrowers had faced challenges to repay loans due to salary cuts and job losses. Also, MSMEs who have been severely affected by disruptions can also get some relief in the form of a 3-month extension in the existing restructuring.

With the RBI loan guidelines permitting lenders to restructure their loans, borrowers could apply for the loan restructuring scheme once it is formulated. This scheme allows borrowers to get his or her loan restructured to avail a further moratorium of two years. 

|Government Proposes to Extend Moratorium for 2 Years

Eligibility for the new debt resolution

The new RBI guidelines for EMI moratorium stipulates certain eligibility criteria that you need to meet if you choose to avail the new debt resolution option: 

1. Loans sanctioned to individual borrowers and entities (excluding borrowers classified as MSME and having exposure up to Rs. 25 crore) by lending institutions are eligible for restructuring. 

2. Credit facilities of individuals and entities which are classified as ‘Standard Account’, but not in default for more than 30 days with the lending institution as of March 1, 2020, shall be eligible for resolution.

3. The credit facilities should continue to be classified as ‘Standard Account’ till the date of the invocation of application shall be eligible for resolution. The date of invocation refers to the date when both the borrowers and banks have agreed to proceed with a resolution under this framework. 

4. The borrowers need to submit a request for the restructuring of the credit facility before December 31, 2020, and must be implemented within 90 days from the date of invocation. However, lenders should try for early invocation.

5. The resolution plans include rescheduling of payments, conversion of any interest accrued, and granting of the moratorium, depending on an assessment of income flow of the borrower (subject to a maximum of two years), among others. Correspondingly, the overall loan term may also get revised commensurately. The moratorium period, if granted, shall be applicable immediately upon implementation of the resolution plan.

6. The implementation of the resolution plan shall be considered valid only if the following conditions are fulfilled:  

  1. All related documents, including the execution of important agreements between lenders and borrowers done by the lending institutions concerned in line with the resolution plan being implemented.

  2. Any changes in the terms and conditions of the loans should be reflected in the books of the lenders.

  3. The borrower should not be a defaulter with the lending institution as per the revised terms. 

7. Implementation of any resolution plan in breach of the above-mentioned timeline shall be fully governed by the Prudential Framework or the relevant instructions that are applicable to a specific category of lending institutions where Prudential Framework is not applicable. 

Bottom line

The COVID-19 pandemic has impacted everyone’s life. The RBI has further released a framework to banks and other lending institutions to offer resolution plans to ease the financial stress of the loan borrowers. Lending institutions need to draw policy, in line with the regulatory framework and RBI guidelines for EMI moratorium, for the restructuring of credit facilities of borrowers who have been impacted by the pandemic.

However, you should apply for the loan restructuring scheme only if you are not able to repay your loan EMIs. For financially secure individuals, it may be better to pass on this one-time restructuring facility and continue with your regular EMIs. 

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