Banking Article, Banking Finance 2021, Banking Finance May 2021

RESOLUTION FRAMEWORK FOR COVID-19 RELATED STRESS FOR PERSONAL LOANS

Introduction:

 

The corona virus pandemic has shattered the dreams of millions of Indians. India’s economy, which was growing rapidly, has fallen flat. Tens of millions of people were coming out of poverty, megacities were being erected, India’s strength was increasing and it was poised to become an economic superpower. Due to slowdown in the economy which was triggered by the impact of COVID-19 pandemic, some employees had either lost their job or working on reduced salaries thereby triggering a problem of serving of their EMIs.

 

The RBI in starting of lockdown period due to COVID-19 pandemic had permitted banks to grant a moratorium cum forbearance of 6 months in deferment of EMIs which ended on 31 August, 2020. This forbearance of 6 months is being made available indiscriminately to all the borrowers, but the matter of fact was that it cannot last to all borrowers for an indefinite period thereby creating an environment of uncertainty amongst the said segment.

 

As the process for normalization of economic activity gathers pace, the need to address the deeper cash flow/balance sheet stress that many of the viable entities may have been exposed to on account of the pandemic and the consequent impact on the financial institutions is also required. Though the phased unlockdown has started, the severity and continuity of COVID-19 impact is visible in business and economy and normalcy will take some time.

 

Keeping in consideration of the genuine difficulties facing by individual borrowers while servicing their EMIs due to reducing earning capacity of the salaried as well as self-employed class, the RBI has advised all the lenders to formulate a Resolution Policy for the borrowers impacted by the ongoing precarious COVID-19 pandemic vide its Circular dated 06 August, 2020.

 

Who are eligible under this scheme?

 

  • In the said circular issued by RBI, clarity had been made on the terminology of ‘Personal Loan’ which was explained with a deeper meaning that prior to the issuance of circular is in the state of ambiguity.

 

 

 

  • Personal Loan covers loans disposed to individuals and consists of
  1. Consumer credit
  2. Education loan
  3. Loans given for creation/enhancement of immovable properties
  4. Loans given for investment in financial assets like shares, debentures etc. thereby covering almost all types of loans given in the individual capacity.

 

Are there any stipulations which are needed to checked while prior availing Resolution Plan under the said relief?

 

  • First and foremost thing is that of pegging the position of Loan on the date of 1 March, 2020, borrower can avail this facility, only if,
  • Overdue component in loan as of 1 March, 2020 should not be of more than 30 days.

 

  • Second is the viability in terms of serving the deferred/restructured EMIs post or simply ascertaining the fact from Lender side that after the implementation of the Resolution Plan, whether in the future course the servicing of EMIs may happen by the borrower in his/her financial capacity.

 

  • The USP under the said relief is not only of granting a moratorium of 2 years but also a borrower is being allowed to avail the facility of rescheduling of loan or conversion of outstanding interest in separate credit facility (according to the nomenclature of an account).

 

What are options available in Resolution Plan under said relief package?

 

  • Resolution Plan in terms of addressing the said difficulties in serving of the EMIs may be resolved by:
    • Rescheduling of repayments
    • Conversion of interest accrued or to be accrued into another cash credit facility or
    • Granting of moratorium (subject to maximum of two years) based on an assessment of income streams of the borrower. Correspondingly, the overall tenor of the loan may be got modified proportionately. The moratorium period, if granted, shall come into force immediately upon implementation of Resolution Plan.
    • Relief relating to FITL (Funded Interest Term Loan) shall be only be extended in case of running borrowal accounts.

 

 

How it gets started i.e. the starting point in Resolution Process ?

 

  • After getting the inputs from the Borrower backed with documentary evidences in writing, the Lenders had to sketch the options available in terms of Resolution Plan. As per case to case basis, keeping in consideration of the impact of COVID-19 pandemic along with future financial scenarios, a consensus had to be made in between lender and borrower on availing the type of relief under Resolution Plan.

 

  • The date on which this consensus happens, will be marked as ‘Date of Invocation’ with a rider that the corresponding Resolution Plan must to be implemented within 90 days from the ‘Date of Invocation’. Under this relief this ‘Date of Invocation’ has to attain not later than 31 December, 2020.

 

How to avail the Relief under the said Resolution Framework?

 

  • Prior to availing the available sort of relief under the said framework, in case the borrower is of segment:
  • Salaried Class:

They had to submit documentary evidence in support of the contention that due to COVID-19 pandemic like letter issued by company terminating their services or a copy of the letter / email correspondence stating the salary cut.

  • Self Employed :

They had to furnish the evidence of financial position impacted with bank statements / GST Returns or any other similar document which is acceptable to lenders for ascertaining the impact due to COVID-19 pandemic.

 

Perspective View about the Relief offered:

 

  • The exercise of Restructuring always comes with a cost which generally are in terms of – elevated interest cost; reflection of ‘Restructured’ term in credit reports which hampers credit scores thereby lessening the borrowers chance of availing another credit facility in future.

 

  • There is always an underlying possibility of extended implication on the future of financials. Therefore, only those who are genuinely facing the bout while serving of their EMIs due to financial instability arisen by current COVID-19 situation should opt for loan resolution plan offered by lender.

 

  • Rescheduling of loan repayments which is one of the solutions under Resolution in the said scheme is to be opted by those, if the there is considerable impact on income generation and to those individual borrowers who at present are having minimal or no source in order to make repayments right now, may opt for the moratorium with longer spread.

 

  • According to one’s own factual situation, one has to opt for the remedial measures which are offered as relief in the form of Resolution that may be in terms of availing of extended moratorium or rescheduling or conversion as permitted under the said Framework of Relief to personal loan segment.

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