RBI brings in new COVID resolution framework supporting economic recovery

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NEW DELHI, INDIA MAY 3: View of RBI buidling on May 3, 2013 in New Delhi, India. (Photo by Ramesh Pathania/Mint via Getty Images)

On 21st August 2020, the Governor of Reserve Bank of India, Shakthikanta Das said that the central bank will come out with the resolution framework for all COVID-19 associated stressed accounts by 6th September. He also mentioned that the banks are planning to extend the moratorium by three, six, or even twelve months under the one-time restructuring.

The RBI has permitted banks to restructure some loans to help economic recovery and support hard-pressed individuals, companies tide over the ongoing coronavirus crisis. With production still to recuperate to pre-COVID levels after lifting the lockdown, lack of demand, job losses, and bad loans are expected to outpour to the highest in 20 years after the loan moratorium closes on 31 August.

on 7th August, RBI had set up a five-member panel under the chairmanship of former ICICI Bank chief executive K.V. Kamath. This is to advocate the eligibility criteria for restructuring stressed loans. The RBI governor also said that the committee will only specify the financial frameworks like debt-equity and debt coverage.

Under the structural guidelines, RBI had said that the lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.

Under the guidelines mentioned by RBI, it also stated that the lending institutions may permit extension of the residual tenor of the loan, with or without payment moratorium, by a period of not more than two years.

 Lenders are making guidelines ahead of the moratorium deadline to decide eligibility and ensure that borrowers do not misuse a one-time loan restructuring package to be offered to stressed individuals and companies once the repayment moratorium closes in a week.

For quicker resolution of proposals, several lenders are setting up internal groups to vet debt recast applications, and plan to divide them into two buckets-customized and standardized.

The RBI governor also mentioned that committee recommendations will be only for business loans, while retail loans will be resolved immediately. Those assets which are under stress before COVID-19, will be resolved under the 7 June circular. He said a moratorium was a temporary solution for the lockdown period. Resolution is a permanent solution.

Shakthikanta Das, while talking about the economic environment, said that RBI has projected forward guidance on gross domestic product (GDP) growth to be in the negative territory in fiscal year 2020-21. In the MPC minutes, most of the members believed that the central bank is constrained in reducing lending rates due to persistent inflation. Das had said in the minutes that it would be practical at this stage to wait for a stronger assessment of the outlook for growth and inflation as the lurch opening of the economy progresses, supply restriction ease and the price reporting pattern stabilizes.

Das lastly said that the central bank will take a call on privatization, once it gets a proposal from the bank or government.

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