New loan restructuring policy offers more clarity to borrowers

The Reserve Bank of India’s (RBI’s) new policy on the restructuring of loans nudges lenders and card issuers to be more transparent and fixes timelines within which financial institutions should act.

During the latest monetary policy, the RBI announced the Resolution Framework 2.0, which allows lenders to restructure loans of individuals and small businesses.

“Similar to Resolution Framework 1.0, the new regulations give the power to lenders to accept or reject restructuring applications. Borrowers still have no say in the process. The decision will be based on the board-approved policy of each institution,” said Adhil Shetty, CEO,

The policy also allows lenders and card companies to choose the relief they want to offer to borrowers. A lender can reduce the equated monthly instalments or EMIs, offer moratorium, convert interest into another credit facility or even combine two or more of these, he added.

Lenders need to restructure the loan or card outstanding in such a way that the tenure extension that borrowers receive is up to two years.

But this time, the RBI’s circular carries instructions for lenders that ensure borrowers have more clarity, unlike the last time. The regulator has asked lenders to come up with board-approved policies within four weeks of the circular (by 2 June).

Earlier, after the RBI published the circular on 6 August, lenders didn’t have a restructuring policy in place for up to two-three months.

Many borrowers visited branches of financial institutions enquiring about restructuring. But they were told that branches have no instructions from the head office. Call centres, too, weren’t of much help.

Meanwhile, lenders also initiated recovery proceedings against borrowers while they waited to apply for restructuring.

The notification for Resolution Framework 2.0 specified that lenders should not only have a board-approved policy but directs them to “sufficiently publicize” it and make it available on their websites “in an easily accessible manner”.

In their board-approved policy, the lenders will also need to include “the system for redressing the grievance of borrowers who request for resolution under the window and/or are undergoing resolution under this window”.

In the earlier restructuring exercise, borrowers didn’t have clarity on why lenders rejected their applications. In case of denial, they couldn’t approach anyone to present their case. If the lenders make the board-approved policy available on the websites, borrowers could understand if they fit the lenders’ criteria or not. They can also present their case by using the lenders’ grievance redressal mechanism specified in the board-approved policy.

The RBI has also asked banks to communicate the decision on restructuring within 30 days of the borrower making an application. Earlier, some lenders did not provide the acknowledgement of the application and took time to convey their decision. In some cases, lenders didn’t even inform the borrower of rejection of the restructuring application. Borrowers kept waiting for the decision until the deadline (31 December).

The regulator has also instructed lenders to take an independent decision. They should not take into account whether other lenders have or haven’t offered restructuring to the borrower.

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