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Corporate Loan restructuring. Will it be a Boon or a Bane for the Economy?

by tatacapitalblogSeptember 14, 2020 in Wealth Management, no comment
Corporate Loan Restructuring: Boon or a Bane for the Economy

Corporate Loan Restructuring is the restructuring of an entity’s debt in order to preserve liquidity and prevent bankruptcy.  It is a middle ground achieved between companies that are in distress and the owners of its liabilities such as banks. The financial institutions that the company has applied for loans to, may choose to reduce the rate of interest and/or give leeway for the period in which they must complete their obligations.

The Need for Debt Restructuring during the Pandemic

COVID-19 has greatly increased the incidence of non-performing assets, brought about by the severe lock-downs and contraction of revenue generation by businesses. This has made it harder for loan-takers to pay back the loans, putting them at risk of bankruptcy and defaulting. The Reserve Bank of India, in its Financial Stability Report, mentioned that the non-performing assets from banks, which were initially reducing steadily, could once again begin to increase to 12.5% by March of 2021. If the already upset economic balance takes a turn for the worse, this number could even increase to as much as 14.7%. There is even evidence to suggest that debts of Rs.3 Lakh Crore could be considered defaulted loan amounts due to the COVID-19 pandemic restrictions.

To help both lenders and borrowers, the Reserve Bank of India made an announcement regarding single-use debt restructuring, to allow those who are indebted to manage the economic stress caused by COVID-19.

This comes on the back of two successive moratorium extension periods, but despite them, companies are still having trouble keeping up with their financial obligations caused by a drop in business. Additionally, many lenders are also resisting the idea of extending moratorium periods as many businesses are also taking undue advantage of the same and they would rather restructure the loans and allow cash flows to resume.

Through a one-time corporate loan restructuring, the institutions lending the credit may decrease the stress by allowing the company to stay above bankruptcy and prevent defaulting on the loan, which can often be a loss for the lender as well.

Additional Read: RBI Loan moratorium Extension: Repayment Period extended by 2 years

Features

Under the Corporate Loan Restructuring scheme, the existing debt amount may not be altered, however, the lending institutions can allow extensions of the remaining tenor of the loan, with or without extending a payment moratorium for up to 2 years. Corporate loans restructuring must be implemented 180 days from the invocation of the scheme along with an intercredit or agreement that must be signed by the lending institution within 30 days. If the banks fail to do so, the provision percentage, i.e. the percentage of the restructured amount that must be kept aside for future losses, will be increased from 10% to 20%.

Debt restructuring

The scheme also only applies to those borrower accounts that had not defaulted on previous loans for a period longer than 30 days prior to the 1st of March, 2020. The debt restructuring process needs to be initiated and implemented by the 31st of December, 2020. A committee of experts has been created to validate the corporate loan restructuring process for large loan size. Furthermore, the aggregate exposure should not amount to more than Rs. 25 Crore, as of 1st March 2020. However, the borrower does not need to belong to any specific sector in order to be eligible under the scheme, though banks, financial institutions, government and municipal bodies are not eligible for the same.

Conclusion

Covid-19 may have undeniably altered the economic landscape of India but the implementation of such debt restructuring schemes would help keep several businesses going in spite of the changes. This paired with new approaches to their business such as online services and payments could effectively keep businesses afloat during these turbulent times. Allowing lenders to tackle restructuring in one go, rather than continuing to work through uncertain moratorium periods, will enable cash flows to resume. Though the previous moratorium extensions seemed only to delay the inevitable, this time around the decision to allow for a one time corporate debt restructuring is a boon for the economy as it will improve the liquidity position of the borrowers, reduce the chances of defaults for lenders, and bring a degree of stability to the economy.

Additional Read: Monetary Relief Measures in the Time of COVID-19

While the Government is doing what it can to ensure that the economy does not suffer, you can help secure yourself financially through TATA Capital’s Wealth Management Solutions. Tata Capital’s expert wealth management team will help you with all your investment decisions, across a wide range of securities, ensuring that your long-term financial needs are met, and you are able to keep yourself and your loved ones financially secure in these troubling times.

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