Amid Covid -19 pandemic and Technical Recession, Retail Borrowers struggle with repayments and defaults; even as Retail Borrowers eyeing debt recast face a mammoth challenge

Retail borrowers are a worried lot; a large majority of them cannot repay their loans; many of the borrowers are finding it difficult to service their loans because of increasing interest rates and inflation.

Irrespective that it has been three months since the end of the moratorium, individual borrowers are finding it challenging to deal with increasing interest rates and, in many cases, even defaulting on loan payments.

Amitabh Chaudhry, Axis bank CEO, had earlier warned that loans to individuals in India would become increasingly difficult as borrowers are currently emerging from three months moratorium.

Retail loans and default in payments will be high in the next three quarters and may be higher than what the banking system has seen in the last eight to ten years.

The individual borrowers are hit by pandemic-induced cash flow disruptions, and a large majority in India are already struggling with pay cuts and massive job losses; as several companies have resorted to mass lay – off of employees, the individual borrowers are left with no choice but to reprioritize, resulting in many of them defaulting in loan payments.

National Payments Corp. of India (NPCI) released data in November this year and showed that at least 40.5% auto-debit transactions failed, higher than the October rates of 40.1% and a steep rise from 31.5% in February, before the Covid -19 pandemic outbreak.

Indian banks have been struggling with increasing bad loans for several years now, particularly when it comes to the corporate sector. 

The RBI had earlier given a six–month repayment holiday to borrowers due to the coronavirus pandemic from March-August; it also allowed the banks to restructure and reclassify bad loan classification during this period. 

RBI replaced the bad – loan classification with a loan restructuring program that enabled the banks to ease lending terms for a small set of borrowers over the coming two years. 

However, even though RBI let banks and non – bank lenders to restructure loans with easier repayment options, not many availed of this facility, the example of which is the State Bank of India (SBI) that restructured only 4000 home and personal loans.

The banks expect the retail loans to further sour with many retail customers turn non – performing in the third and fourth quarters; thus, the banks could show further retail slippages in the third and fourth quarters.

Retail Borrowers unable to restructure their loans

As per reports, retail borrowers are finding it difficult to convince the banks of their eligibility for loan recasts.

An example of such is the fact that very few banks have reported cases of retail loan recasts in the country. This has led to any borrowers struggle and show their discontent on various social media platforms, even as they struggle with pay cuts and mass layoffs. 

The reason for the banks to not follow retail loan recasts is being touted as due to the varying interpretations of the central bank’s guidelines on restructuring individual loans. 

Hence many borrowers who have approached the banks for the same face rejection of their requests based on the banks’ interpretation of the eligibility rules. 

After laying down broad eligibility norms, RBI let the decision for the same on the individual lenders to decide on which accounts to approve. 

However, many borrowers have said that this broad eligibility norm and the ultimate decision left on individual lenders have led to a situation wherein private banks reject recast proposals and, hence, leave the borrowers in a lurch.

A debt recast typically comprises extending the loan’s tenure and may also include a higher interest payout over the extended period. But the same means little sense to the individual borrowers as the rise in interest rate further compounds the problem they are already facing.

According to many of the borrowers who have approached banks with the request in several of the cases, while the banks agreed to allow debt recast, they rejected the requests for a moratorium.

However, Banks on their part have said that the request for restructuring is available to the customers until 31 December, the customers can make a request, and it is up to the bank to identify stress borrowers, per their policy, and how to deal with such requests. 

The banks have also stressed on the fact that identifying genuine cases of stressed borrowers is both a tedious and time-consuming process. The banks have mandated these customers to prove that they have lost their jobs or have reduced incomes due to the pandemic.

What can the Borrowers do?

The borrowers struggling with repayments can consider the option of 

• an out – of – court settlement
• enlisting the help of credit counseling centers to work out a debt management package through negotiations with the respective banks  
• filing for insolvency (this is usually for businesses in India)

The debtors need to understand that it is a legally tenable option and can act as a shield against creditors’ harassment.

However, the process is complicated, and a petition has to be filed in the court under the Provincial Insolvency Act, 1920, or the Presidency Towns Insolvency Act, 1909.

The latter applies to the Presidency Towns – Calcutta, Bombay, and Madras; the former pertains to India’s whole except the three mentioned above. 

In the Presidency Towns Insolvency Act, the borrower is declared insolvent as soon as the petition is filed, but in Provincial Insolvency Act, the court sends a notice to the creditors to ensure that the insolvency is genuine. It is only after the creditors give a green signal that the court declares the borrower as insolvent. 

The debtors must furnish proof that can validate to the court that the debtors are unable to repay debts. The court also has the option of issuing directions to the creditors for assessing the debtor’s estate, if any. 

On their part, the creditors have to file the claim once the court publishes the matter of insolvency in its official gazette; it is mandatory for the creditors to claim their share; else, the borrower has no obligation to pay. 

There are other proofs that the debtor is obliged to file with the courts.

However, as of now, the borrowers who have been left in a lurch due to the pandemic-induced debt situation can only hope for the RBI to come up with specific relief packages to retain an individual sense of sanity and hope.