Loan recasting or restructuring refers to the process whereby a loan’s terms and conditions are reset to help the borrower pay it off easily. On most occasions, it involves tweaking the loan’s rate of interest or tenor so that the borrower finds it easy to repay. It is generally done for those who due to some genuine reasons find it difficult to repay the loan taken.
In 2014, the Reserve Bank of India (RBI), declared norms for the restructuring of loans disbursed by non-banking financial companies (NBFCs). So, what are they? Read on to find out.
What are the Norms?
As per the new norms set by RBI, NBFCs, like the commercial banks, will have to keep aside a provision amount of 5% to meet the needs of restructured loans. Also, an NBFC loan disbursed for an infrastructure project will fall in the category of non-performing asset (NPA) if the project doesn’t take off commercially within 2 years from the original date of commencement of commercial operations (DCCO), unless it’s restructured.
Additionally, if NBFCs disburse a loan for a non-infra project, which fails to take off commercially within one year from DCCO, it would be treated as a non-performing asset (NPA). Even in a situation of regular recovery, if the commercial operations fail to commence within one year, the loan granted will be categorised as an NPA, until it’s restructured. A minimum of 0.25% of the loan amount needs to be maintained as a provision amount for such loans.
For both infra and non-infra there are types of business loans in India that NBFCs offer, if their respective commercial operation time limits are not adhered to, then the loans will be restructured and the provisioning amount for the same will rise to 5%. This increased provision would remain active for a period of two years from the date of restructuring.
Need for these norms
Forming a significant part of the financial structure of the country, NBFCs have radically changed the loan landscape of the nation. They offer easy finance to individuals as well as businesses.
For instance, Bajaj Finserv offers Business Loans up to Rs. 30 lakh at a competitive rate of interest. The collateral-free loan comes with a unique Flexi Loan Facility that allows one to withdraw funds as and when required from the approved limit with interest being charged only the amount borrowed. Pre-approved offer on the loan further makes it easy to avail finance. To know the pre-approved loan offer one needs to share basic details.
Experts opine that restructuring of NBFC loan in India is aimed to create a level playing field between banks and NBFCs. If restructuring norms are not in place, piling of bad loans will stretch the finances of NBFCs, making it difficult for them to operate.
It’s a known fact that bad loans make it difficult for financial institutions to operate and force them to borrow money from RBI and people at a higher rate of interest. This can impact bottom-line revenues and hit profit margins.
Also, if the monitoring and provisioning of NBFC loans in India are left unregulated and unsupervised, it would become difficult for them to avail funding from in times of need, particularly from banks. As per RBI’s data, in the one-year period ending September 2018, banks lent Rs. 1.68 lakh crore to NBFCs. Additionally, the current norms in place would give NBFCs more flexibility to deal with bad loans and take corrective measures on time.