The Reserve Bank of India has graciously allowed a one-time dispensation to restructure all loans given by financial institutions due to the unexpected stress and confusion unleashed by the COVID-19 pandemic.
The resolution framework has formed a window in which certain important guidelines for precise calculations in the restructuring process. This will allow the banks to extend the repayment period and reduce the chances of classifying loans under Non-performing assets. Keep in mind that High NPA is bad for the bank as it is evident that loans and advances are about to have Defaulted.
On 6th August 2020, RBI released a one-time-only restructuring scheme for the monetary policies. The major reason for RBI to take these measures is to reduce the amount of non-performing assets which was rising to 14.7% according to the latest financial stability report. But as far as the current issue is concerned the main function of the banking business is for lending. Lending involves substantial risks because apart from the collateral there is no way to see the future where the borrower repays the amount. These days banking institutions avoid risk and have focused most of their efforts into investing in various government securities or to RBI for Reverse Repo Rate window. The right balance every bank should maintain is to identify the point in which they can sustain a good number of depositors at the same time account for risk factors and give loans accordingly to be borrowers who have a good credit report or appropriate collateral security.
The disruptions in the economy due to the COVID-19 pandemic has left the world with possible miscalculations and doubt. So, it is essential to understand the one-time restructuring window that RBI is providing will be rational so as to keep the banks, borrowers, and economy from the negative backlash of this global pandemic situation. The Strategic financial parameters will complement the resolution plans that are being formed and approved by the RBI. If any modifications in the subject matter will be made within 30 days, Says RBI.
Under the Prudential Framework, RBI will authorize a credit rating agency. Which will foresee the independent credit evaluation in the resolution plan? Though it is very sceptical to understand the involvement of these credit rating agencies after viewing their track record, it would be fair to say that RBI is confident in this action.
A paradigm-shifting change like this will involve a substantial amount of time to come in action. Regardless, it is very unlikely to be expecting huge changes or restructuring at this period of uncertainty.
