The financial stability of the banking sector needs to be kept in mind while providing loan restructuring along with depositors' interest.
There are crores of depositors (small depositors, middle-class people, retired persons) who depend on deposit income while borrowers are only in lakhs.
The loan restructuring includes altering the terms of existing loans, usually to make them more favorable to the borrower. For example, the lender may restructure a loan to receive a lower interest rate or monthly payment.
Restructured loans are most common if the borrower states that he/she can no longer afford payments under the old terms.
The governor does not want a repeat of the Non-Performing Asset(NPA) surge that happened after 2014 with loan restructuring.
The economic measures taken by the RBI in the wake of the global financial crisis of 2008-09, led to a surge in bad loans from 2014-15.
The idea behind loan restructuring was to protect viable businesses that are facing genuine cash flow problems. The revival of business will ensure NPA levels are kept low and also ensure quick economic recovery.
However, the governor cautioned that the economic recovery would be gradual, as the upticks in some sectors appear to be levelling off as efforts towards reopening of the economy are confronted with rising infections.
In the recent Monetary Policy report, RBI has allowed banks to restructure loans to reduce the rising stress on incomes and balance sheets of large corporates, Micro, Small and Medium Enterprises (MSMEs) as well as individuals.
A large number of firms that otherwise maintain a good track record are facing the challenge as their debt burden is becoming disproportionate, relative to their cash flow generation abilities.
The RBI set up a committee headed by K.V. Kamath on restructuring of loans impacted by the Covid-19 pandemic.
The committee was tasked to recommend parameters for one-time restructuring of corporate loans.
It also specified that restructured loan tenure cannot be extended beyond two years.
The major criticism of the restructuring scheme is the select 26 sectors identified by the K V. Kamath committee. However, there are many other sectors that are eligible for a restructuring scheme.
The 26 sectors include automobiles, power, tourism, cement, chemicals, gems and jewellery, logistics, mining, manufacturing, real estate, and shipping among others.
As per the RBI, only those borrowers which were classified as standard and with arrears less than 30 days as at 1st March 2020 are eligible for restructuring.
The two year period is also very short for economic recovery. Given the GDP contraction and no second economic stimulus by the government in sight, the recovery will take longer than two years.
In May 2020, the government announced the ‘Atmanirbhar Bharat Abhiyan (or Self-reliant India Mission)’ with an economic stimulus package — worth Rs. 20 lakh crores aimed towards achieving the mission.
The loan restructuring must be a temporary step as continuing it for long may lead to an inflation surge, currency crisis, and financial instability. It is important that post-Covid-19, regulatory measures are rolled out in a very careful and orderly manner and the financial sector returns to normal functioning without relying on the regulatory relaxations as the new norm.