Given the aversive situation that the world had found itself in, coping up with the antagonistic circumstances was the only feasible way out. But given varied nature of various businesses, it was found that certain sectors were less resilient to the evil charms of the pandemic. Banking sector, where debts are always burgeoning even under normal circumstances, during the detestable pandemic saw a greater threat to the paying capacity of the consumers and hence a greater threat to its odious bad banks crisis.
It is no news that the world was brought to a standstill when the pandemic struck. This claim can be corroborated by closure of economies and standstill economic activities which led India to witness 23.4% contraction in the first quarter of financial year 2020.
Given the aversive, crippled finances of public due to their increased medical expenditure, low employment and burgeoning inflation, restructuring of loans was introduced to remove undue pressure from the consumer, by central banks around the world was introduced.
The Reserve Bank of India (RBI), given the crippled economy and specifically debtor’s crippled finances and debilitating paying back capacity, had effectively proposed two restructuring frameworks on May 05, 2021.
Why was restructuring required?
The restructuring of loans was necessary as it provided support to small businesses that were severely hit by the second wave. Taking into consideration various studies which stated that Indians were 6.1% poorer than they were in the FY 2020 and how the increasing number of middle class had fallen below the poverty line, banks had initiated the process of restructuring of loans up to Rs 25 crore in line with the COVID-19 relief measures.
It is to be noted that during such trying times, debtors were offered a helping hand by extension of relief as per RBI Resolution Framework 2.0 dated May 5th, 2021. Thus, if you were under financial stress caused by the COVID Second Wave, you could have opted for restructuring of your account.
It is to be noted, that individuals who had opted for restructuring of loans in framework 1 were not in the lurch as the RBI had permitted the banks and lending institutions to modify the plans and increase the period of the moratorium to help mitigate the potential stress.
In the newer one-time loan restructuring scheme, the loan would have remained standard despite being recast. Additionally, the banks had to make additional provision in such cases. However, it is to be noted that there are certain disparities between the two notifications in terms of eligibility criteria and process.
The finance ministry also needs to be hailed for its timely restructuring policies that were coupled with stimulus packages. Recently, another stimulus package was unveiled to help the consumers in the economy breathe. Though it was the extension of the first but the effects it had on the economy cannot be ignored. According to the reports, the economy had turned a corner on June where unemployment rate had fallen to record low.
Additionally, the restructuring scheme by the government had provided relief for not just the borrower but also the lenders who would have hesitated to restructure eligible and potential loan accounts. Thus, the government quite skillfully balanced the NPA crisis which could have worsened given the crippling state of the economy. Therefore, it can be effectively and rightly stated that finance ministry’s sagacious move to call for loan restructuring with fiscal stimulus helped provide impetus to the already battered economy.