On 6th August 2020, RBI allowed banks to restructure the banks and non-banking financial companies (NBFCs) to restructure personal loans to those who are facing financial constraints and finds it difficult to repay them. Restructuring of personal loans also includes granting moratorium to the borrowers. RBI has given choice to lenders for granting moratorium to individual borrowers for a maximum period of two years.
Personal loans include those which are given to individuals and include consumer credit, loans given for creation or enhancement of immovable assets, education loan, and loans given for investment in financial assets like shares, debentures, and so on.
RBI stated that the resolution plans may include reorganization of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of a moratorium. This will be based on the valuation of the income flows of the borrower. However, banks need to provide 10 percent for implementing resolution in personal loan accounts.
RBI had previously allowed granting moratorium to the borrowers from March 1, 2020, for six months. It was conducted in two phases. In the first phase, the moratorium was granted till May end, which was then extended till August 31, 2020, in the second phase.
The regulator has approved only ‘standard’ accounts to be eligible for restructuring. And only those borrower accounts shall be qualified for resolution under this framework, which were classified as standard, but not in default for more than 30 days with the lending institution.
Once restructured, such loans of the borrowers would be considered as standard. This means that the lenders won’t describe the borrower as a nonpayer to credit bureaus if the borrower follows the new payment structure.
RBI has also mentioned the facilities that banks can offer to borrowers when restructuring the loan. They can reschedule the payments, convert interest into another credit facility, and provide moratorium of up to two years. The overall duration of the loan can also be modified based on the resolution granted. If someone has faced a reduction in salary, and his cash flows are affected, banks can lower the equated monthly installment (EMI) and increase the period.
It has been said that banks may require a filtering mechanism and a criterion to decide who gets the resolution plan. Otherwise, it’s difficult to offer a resolution to retail customers as compared to institutions.
RBI wants the resolution plan to be offered only to eligible borrowers. Institutions could, therefore, have the choice to choose the borrower based on the facts of the case. The facility, hence, could be available to genuine borrowers who have lost their jobs or have faced a salary cut, putting stress on their finances.