Retail loan restructuring plan finds few takers

Borrowers will need to get a resolution plan sanctioned before December 31, and the lender will need to implement it within 90 days. The recast loan will continue to be considered as standard till the borrower sticks to the resolution plan.

Loan recast offers by banks to retail customers have found few takers despite widespread financial distress, baffling bankers.

Over a month after State Bank of India launched a website for the hassle-free implementation of restructuring of retail loans as proposed by the Reserve Bank of India (RBI), it has received just 5,000 requests. That compares with 23% of SBI’s 420 million customers who opted for moratorium in March and 9% in July.

Smaller banks said many customers are opting to repay loans as they don’t want their credit scores to be affected.

“People have started paying. Many retail customers have not lost jobs and have received relief from employers. Their repayments after the moratorium period will start only post December-end. Only then will one get to know the actual situation,” said an executive director of a state-run bank.

Banks have offered to recast loans based on customer’s assessment of future income. SBI, for instance, has offered to extend the payments moratorium by as long as 24 months, and extend loan tenure by a period equivalent to the moratorium granted.

RBI had allowed a one-time restructuring of loans after the six months’ moratorium facility ended in August. The regulator has allowed lenders to retain these loans as “standard” on the books, which will help lower non-performing assets. According to this framework for resolving Covid-19-related stress, the resolution of stressed personal loans will be available only to those borrowers who were repaying loans regularly as on 1 March this year.

Borrowers will need to get a resolution plan sanctioned before December 31, and the lender will need to implement it within 90 days. The recast loan will continue to be considered as standard till the borrower sticks to the resolution plan.

To be sure, while retail recast requests are low, banks continue to see a high rate of repayment bounce data, as evidenced from the National Automated Clearing House data, which showed 41% of auto-debit transactions by volume in September have failed against 31% in February, Mint reported on 12 October.