The Reserve Bank of India’s (RBI) governor recently highlighted the need for a balanced loan restructuring scheme to manage Covid-19 related stress. The proposal aims to ensure financial stability in the banking sector and protect the interest of depositors, alongside meeting the needs of borrowers.
Understanding Loan Restructuring
A loan restructuring procedure modifies the terms of existing loans to make them more borrower-friendly. Typically, the lender may opt to lower the interest rate or monthly payment to accommodate borrowers who cannot afford payments under the previous loan terms. However, the RBI’s governor seeks to avoid a recurrence of the Non-Performing Asset (NPA) surge, a trend observed post-2014 with loan restructuring.
Historical Reference: The 2008-09 Global Financial Crisis
The global financial crisis of 2008-09 saw the RBI take economic measures which inadvertently led to an increase in bad loans beginning from 2014-15. Restructuring loans was seen as a method to safeguard viable businesses struggling with cash flow issues. This approach ensured that NPA levels remained low and encouraged a swift economic recovery.
Caution in Economic Recovery
While acknowledging the potential benefits of loan restructuring, the governor has warned that economic recovery will be a slow process. Although some sectors are showing signs of improvement, there seems to be a plateauing effect due to escalating Covid-19 infection rates.
Monetary Policy: Steps Taken by the RBI
In its recent monetary policy report, the RBI has green-lighted banks to restructure loans in response to increasing stress on large corporates, Micro, Small and Medium Enterprises (MSMEs), and individual earners. Many firms with otherwise solid track records are grappling with a disproportionate debt burden compared to their cash flow generation capabilities.
The KV Kamath Committee
The RBI formed a committee under the leadership of KV Kamath to deliberate on the restructuring of loans impacted by the pandemic. The committee has proposed five financial ratios and sector-specific thresholds for resolving Covid-19 related stressed assets in 26 sectors.
Controversy Surrounding the Restructuring Scheme
Criticisms of the restructuring scheme have focused on the selection of the 26 sectors, which overlooks other eligible sectors. These sectors include automobiles, power, tourism, cement, chemicals, gems and jewellery, logistics, mining, manufacturing, real estate, and shipping, among others. Moreover, the stipulation that restructured loan tenure cannot exceed two years has been deemed too short for economic recovery, especially considering the current GDP contraction.
The ‘Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)’
In May 2020, the Indian government announced the ‘Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)’, an economic stimulus package worth Rs. 20 lakh crores. This initiative aims to support businesses struggling with the economic fallout of the pandemic.
Final Thoughts: A Temporary Measure
Loan restructuring is intended as a temporary remedy. Prolonged application could lead to an inflation surge, currency crisis, and financial instability. Thus, it is crucial for regulatory measures to be implemented judiciously post-Covid-19, enabling the financial sector to resume normal operations without relying on regulatory relaxations as the new norm.