Everything You Need to Know about RBI’s Loan Restructure Plan

Everything You Need to Know about RBI’s Loan Restructure Plan

The Reserve Bank of India has confirmed it will encourage lenders to restructure the loans which borrowers are finding difficult to repay due to the COVID-19 pandemic’s economic effects.

The restructuring plan would enable the borrowers to reschedule their loan payments or get a limited loan repayment relief or lower interest rates on their existing loans, depending on the agreement they finalize with their financial institutions.  The personal loan eligibility for new loan applications would also be dependent on terms set by the lender.

What has RBI reported on the restructuring of loans?

RBI has announced a one-time lenders restructuring scheme that will allow them to change repayment conditions for their borrowers, affected by the COVID-19 lockdown. Lenders can do so now while maintaining the borrower’s account as standard, and won’t have to mark them as defaulters / their account as a non-performing credit.

Lenders are now also allowed to restructure debt without changing a troubled company’s owners, as was the case under current terms. However, these simpler terms are only permitted for those borrowers who were affected by COVID-19, and not others.

How long is the window open for restructuring?

The last date financial institutions will invoke effective loan restructuring is December 31 2020.

Which lending institutions’ loans can be restructured?

The RBI has approved the use of this restructuring facility by all public banks, private banks, international banks operating in India, small finance banks, local banks, regional rural banks, main (urban) cooperative banks, state cooperative banks, district central cooperative banks, NBFCs, housing finance firms and other all-India financial institutions.

Are all of the restructuring loans eligible for the scheme?

The scheme in question applies with certain conditions to all personal and corporate loans which came under trouble due to COVID-19. But it is not available for financial services companies, MSME borrowers who have total unpaid loans of more than Rs. 25 crores or farm credit or loans to government institutions.

Any borrowings for agricultural lending to Primary Agricultural Credit Societies (PACS) or Farmers’ Service Societies (FSS) will not be liable for this reform, either.

What are the conditions for lenders being entitled who can benefit from this scheme?

All those lenders who made daily repayments for their loan, and as of March 1, 2020, were not delinquent for more than 30 days, are entitled to benefit from this package.

What incentives does the restructuring get lenders with personal loans?

Restructuring the loan of a borrower may include modifying loan terms by rescheduling payments, transforming any interest incurred (or to be borne) into another small loan, or granting a moratorium, subject to a maximum of two years. The choice of personal loan balance transfer will not be affected.

A qualified personal loan borrower’s account will be held in the lender’s books as “ordinary” or not by default until the date on which the borrower and lender agree to proceed with the restructuring (date of invocation).

Terms for financial institutions reforming personal loans

Lenders / financial institutions are allowed to implement the resolution or restructuring plan within a maximum of 90 days. During this time, if they fail to execute the resolution plan, they will not obtain any gain under the COVID restructuring scheme. They will have to declare the loan non-performing assets and set aside higher provisions.

What about Corporate Loan Restructuring?

All borrowers requesting a loan recast for the company will first have to sign an inter-creditor agreement within 30 days of them agreeing to a loan restructure plan. The recast plan should be approved by lenders representing at least 75% of the loan value and 60% of the number of lenders to be invoked.

Assuming that the creditor agreement is not signed within 30 days of the summoning of the restructuring, the recast will fail, and the borrower would not be eligible to seek recast again under this window.

Banks can agree to reschedule repayments from the corporate borrower, allow for a moratorium period, lower rates, etc. under this scheme without changing ownership, and without downgrading the account to an NPA. This provided that, as of March 1, 2020, the account of the corporate borrower was not overdue for more than 30 days, and is exempts.

For corporate creditors, lenders have a limit of 180 days to enact a settlement or restructuring plans.

How does the RBI ensure banks can protect themselves if such restructured loans turn bad?

Under current regulations, when restructuring, the financial institutions must set aside 15% of the overall value of the loan as a provision buffer. Under this COVID-specific window, however, RBI has asked borrowers to keep 10% of the renegotiated debt aside after the program has been introduced for both personal and corporate loans.


The restructuring scheme by RBI is seen as a welcome step to reduce the financial burden and to provide flexibility in the borrowing process.