Banks to roll out stressed loans resolution scheme by Sept 15

Finance minister Nirmala Sitharaman on Thursday directed banks and non-banking finance companies (NBFCs) to roll out their resolution schemes for stressed borrowers by September 15 post-moratorium period, but asked them to factor in Covid-19 related distress to assess creditworthiness of the borrowers, an official statement said.

Businesses, particularly micro, small and medium enterprises (MSMEs), want the moratorium period on loan repayment to be extended. The moratorium period ended on August 31 as the Reserve Bank of India (RBI) did not extend it.

Experts said this is not the time to initiate the resolution process as MSMEs are the worst sufferers of the Covid-19 pandemic and consequent lockdown.

“Micro and Small enterprises have not yet been out of stress. They want the moratorium to be extended beyond August 31 as businesses have not yet returned to normal,” said Vinod Kumar, president at the India SME Forum.

Mint reported on August 29 that the RBI decided against extending the moratorium period beyond August as it was concerned about changes in credit behaviour that could induce among borrowers and increase the risk of loan defaults.

The report quoting RBI governor Shatikanta Das said the moratorium on loans was a temporary solution in the context of the lockdown, while a resolution framework would provide durable relief to borrowers facing Covid-related stress.

The RBI had announced the loan moratorium to provide relief to pandemic-stressed borrowers in March 2020 initially for the three months till May 31, which was later extended till August end.

“As and when the moratorium on loan repayments is lifted, borrowers must be given support and Covid-19 related distress must not impact the lenders’ assessment of their creditworthiness,” a finance ministry statement quoting Sitharaman said. The finance minister held the review meeting on Thursday with banks through a video conference to assess their state of preparedness for implementation of the loans resolution framework for Covid-19 related stress.

The finance minister told banks and financial institutions to immediately put in place a board-approved policy for resolution while identifying eligible borrowers and reaching out to them. She also asked them for a quick implementation of a sustained resolution plan to revive every viable business, the statement said.

She asked the lenders to launch a sustained media campaign to create awareness for borrowers after rolling out their resolution plans by September 15. She advised them to ensure that regularly updated frequently asked questions (FAQs) on the resolution framework are uploaded on their websites in Hindi, English and regional languages, and also circulated to their offices and branches.

The lenders assured the FM that they were ready with their resolution policies. Lenders told her that they had started the process of identifying and reaching out to eligible borrowers, and they would comply with the timelines stipulated by the Reserve Bank of India (RBI). The central bank is assisting in the resolution process, the statement said.

Kumar, who is quoted earlier, said, “If banks start the resolution process, most of the smaller units will turn out to be stressed as they are not in a position to start paying debt. Those that are, have not taken the moratorium or have started paying already.”

According to him, many small units have not yet attained normal business. “Despite the Centre having announced Unlock 4.0, it is not implemented at State and local levels and workers as well as supply chains have not resumed fully. This is not the time to initiate resolution processes. This is the time to extend a moratorium for survival of businesses,” he said.

Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP said, “The review meeting of the finance minister with the lenders is an indication that the moratorium may not be extended.”