The biggest cost that a borrower of a restructured loan will pay, is that in case the restructuring is not in tandem/compatibility with the projected recovery and cashflows of the borrower
The six months mandatory moratorium period, which got extended to end September is over and except for delaying the inevitable for the borrowers i.e. repay the loan or face coercive recovery by lenders, it could do little. That’s because while the moratorium did give extra time to the borrowers to get their finances in order, they simply could not. The six month moratorium period witnessed a contracting economy, wherein the financial position and cash flow of borrowers only deteriorated further. In terms of income, liquidity and cash flow, the situation of borrowers was only worse off, as at the end of the moratorium period, than when it began in March. They were thus unable to bolster and strengthen their finances, so as to repay loans when the protection of the moratorium ended, making a widespread default and buildup of NPAs in the banking system imminent. The moratorium period being over, the choice before the borrowers is to either repay, restructure, refinance or default on the loan repayment, depending upon the borrower’s financial position.
The RBI itself has warned that the covid crisis could lead to an almost doubling of bad loans in the banking system by end March 2021. It was therefore in the monetary policy announcements of 6th August, that the Reserve Bank announced a restructuring of loans, to prevent any huge buildup of defaults/NPAs in the system, which otherwise looked inevitable in a contracting economy. The restructuring regulations were expected to be in place seamlessly after the KV Kamath Committee recommendations were received, but that has not really been so far, with few banks having announced their guidelines till date, for the restructuring of loans. While HDFC bank is willing to merely grant an additional tenure of 24 months for repayment under its restructuring guidelines, SBI is willing to grant multiple restructuring options to its borrowers. In the present scenario, where the peak of the worst of the economy is yet to come and further deterioration of borrower’s cashflows is certain, the mere grant of additional time under restructuring, only amounts to postponing the inevitable defaults to a future date.
Moreover, restructuring of loans is not a painless exercise. It comes at a heavy cost to the borrower in various ways. To start with, in order to be eligible for the restructuring of loans, one needs to meet the financial parameters, including debt/equity norms set by the Kamath Committee recommendations. Many an entity will need to infuse additional funds/capital, to meet this criteria, which will not be easy in this uncertain and slowing economy. Further, the proposed restructuring of loans entails no haircuts or write off of loans, due to which interest not paid during the moratorium period will be converted into an additional loan, adding to the debt burden of the borrower. Like in the case of SBI, which will charge an additional interest of 0.35% on restructured loans, every other bank will do that making the loans even more expensive. They are also likely to charge a processing fee for the restructuring of the loans. And finally, wherever a loan is restructured, the credit score of the borrower will be downgraded thus making it difficult and expensive for it to borrow further in future. The biggest cost that a borrower of a restructured loan will pay, is that in case the restructuring is not in tandem/compatibility with the projected recovery and cashflows of the borrower, then there will certainly be a default in the loan repayment at a future date and it will have far more severe consequences then, than what would be if it is declared a defaulter now, due to the comparatively softer attitude of bankers to such default at present, in recognition of the impact of the covid crisis on the cashflows of borrowers.
The options available to a borrower in the order of priority, upon the end of the moratorium period, are either sell assets and repay, or seek refinance of the loan on better terms from another lender, or seek a mere top-up loan from the present lender or if none of that works out, get the loan restructured. The restructuring of the loan is an expensive and painful exercise and not as easy as it sounds, and if it is being done just to postpone a default/NPA, then it certainly provides no genuine relief, to the lender as well as to the borrower.
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