According to the RBI guidelines, lenders may reschedule payments of the borrower, convert the interest accrued or interest that will accrue into another credit facility. Furthermore, the plan may entail granting of moratorium to borrowers, based on assessment of income streams of the borrower, subject to a maximum of two years, and the loan tenor can be modified accordingly. The moratorium period, if granted, will come into force immediately upon implementation of the resolution plan.
According to Krishnan Sitaraman, senior director, CRISIL Ratings, “Retail borrowers have faced stress because of the pandemic, resulting in their debt servicing ability being significantly impacted. The moratorium gave them some relief in terms of repayment, but the restructuring will give them long-term relief.”
However, he added that the economic challenges will result in asset quality issues manifesting itself. The retail segment is not insulated from it, as borrowers face cash-flow issues. While retail has been considered a safe segment, bad debts in retail will go up proportionately more than the other segments. In other segments, non-performing assets (NPAs) are already high. The RBI measures will help to cushion that impact.
Anil Gupta, vice-president and sector head–financial sector ratings, ICRA, said, “The debt restructuring for personal loans
will be a breather for the retail segment under stress due to job/business losses and salary cuts. It will allow retail borrowers to recoup the losses. Two years of the moratorium is a substantial time within which we can expect the economy to recover somewhat.”
The RBI’s financial stability report had revealed as much as 80 per cent of individual borrowers of public sector banks and 42 per cent of private sector banks had opted for the moratorium as of April 30. Since then, banks have revealed their books under moratorium have shrunk, but borrowers under the retail segment opting for the moratorium are relatively higher than the borrowers in the corporate segment, indicating cash-flow issues for individual borrowers.
“The personal loan resolution framework will cover a bulk of existing loans sanctioned to individual borrowers with respectable repayment track record. It will help them repay their loans according to the changed repayment capacity caused due to the Covid pandemic,” said Naveen Kukreja, chief executive officer (CEO) and co-founder, PaisaBazaar.
It will also provide major relief to lenders and reduce financial stability risks to the overall economy, as most lenders were expecting a major spike in their NPAs after the end of the loan moratorium facility, added Kukreja.
Lenders are expected to keep provisions higher than held under IRAC norms, or 10 per cent of the renegotiated debt exposure of the lending institution post implementation of resolution plan. Half of the provisions may be written back upon the borrower paying at least 20 per cent of the residual debt without slipping into NPA post implementation of the plan, and the remaining half may be written back upon the borrower paying another 10 per cent of the residual debt without slipping into NPA subsequently.
Not only borrowers, lenders with significant retail exposure are expected to benefit from this move.
According to ICICI Direct Research, addressing hardship faced by retail borrowers amid the pandemic is a positive for lenders with substantial retail exposure, including HDFC Bank, Kotak Mahindra Bank, Bajaj Finance, and State Bank of India.
Furthermore, the RBI decided to increase the permissible loan-to-value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes, from 75 per cent to 90 per cent. This relaxation will be available till March 31, 2021; beyond that, it will be again back to 75 per cent.
Experts said the increase in LTV for gold loans is a surprising move. Since it is for a short period of time, lenders who wish to take risks may opt for it by giving shorter duration of loans — say six months. This has been done to provide liquidity to retail borrowers to help them tide over the crises.
Zarin Daruwala, CEO, Standard Chartered India, said household finances will get a boost, with the increase in the loan to value of gold loans.
Kukreja said, “A higher LTV ratio will not only help borrowers avail of higher loan amounts, it may also provide relief to existing gold loan borrowers in case of any steep correction in gold prices in the near term.”
According to C V R Rajendran, managing director and CEO, CSB Bank, “This step by the RBI will place more money in the hands of borrowers. While this move will help broaden the gold loan market, we will also witness increased competition in this segment. Lenders will need to ensure their valuation and risk management processes remain tight and robust.”