EXPLAINED: One Time Relief to Loan Defaulters

The havoc wreaked by the coronavirus variants in the last two years of its outbreak on the economy has brought miseries to the businesses, individuals and households. It wiped out the incomes of millions of households and individuals.

The loss of income among other things impacted the loan repayments. Even as the government and the Reserve Bank of India (RBI) rolled out certain stimulus packages which included moratorium on loan repayments for a specific period, the recovery in economic activities and income generation didn’t pick pace on the expected lines so far.

Amid this scenario when another variant of the virus, Omicron, has emerged on the scene, apprehensions loom large that banks may witness slip of standard assets into the bad loan category.

Notably, recovery of bad loans, commonly known as NPAs (non-performing assets) in pre-COVID crisis was already giving a tough time to banks. According to the RBI data, scheduled commercial banks (SCBs) have recovered an amount of Rs 4,18,687 crore during the last three financial years.

Recovery as a percentage of gross non-performing assets (NPAs) of SCBs stood at 13.1 per cent in 2017-18, he said adding it rose to 15.1 per cent in 2018-19 and to 15.8 per cent in 2019-20.

After that, it declined to 12.8 per cent in 2020-21 (provisional data as on March 31, 2021) against the backdrop of the pandemic.

Government has hinted about comprehensive steps for speedy recovery of NPAs. Among other stringent measures, personal guarantor to corporate debtors has also been brought under the ambit of IBC.

The government has also incorporated National Asset Reconstruction Company Limited (NARCL) and it was registered with the Registrar of Companies on July 7, 2021. RBI, being the regulator of Asset Reconstruction Companies (ARCs), has already prescribed a regulatory framework for the functioning of ARCs.

There are well-laid norms for transfer of stressed assets by banks and non-banking financial companies to ARCs and identification of non-performing assets by an ARC is an ongoing process.

In the given scenario, J&K Bank has come out with a big relief to the loan defaulters. In fact, it was a shot in the arm of loan defaulters (not willful) when J&K Bank announced launch of Special One Time Settlement (OTS) Scheme for them. It is going to be a golden opportunity for the loan defaulters whose accounts have been classified as NPAs.

Who is eligible under the scheme?

The scheme accommodates a wide range of loan defaulters falling in different categories. The defaulters whose accounts have been classified as D3 and Loss Assets with outstanding of Rs.15.00 lakhs and up to Rs.500.00 lacs as on September 30, 2021 are eligible to get relief under the scheme. It also paves way for the defaulters having cases pending before Courts / Debt Recovery Tribunals (DRTs) to take advantage of the concessions envisaged in the scheme. However, in this case they have to obtain a consent decree.

Besides, those defaulters who stand under notice issued u/s 13(2) or taken action u/s 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI-2002) can also take route of the scheme for relief. The loan defaulters under consortium or multiple banking arrangements also stand accommodated under the scheme.

Does the scheme cover loan defaulters in personal loan, car loan and education loan segments?

No. There are certain categories of loan defaulters which fall outside the ambit of this special One Time Settlement (OTS) Scheme. It includes personal loans, housing loans, education loans, clean overdrafts and car/vehicle loans. Even loans granted against the bank deposits, LIC policies, KVIP, Mutual funds, Shares etc. are also not eligible.

Is it possible for a loan defaulter who is repaying the loan settled through a ‘compromise’ to avail benefits of this special OTS scheme?

No. Non-performing loans settled through a ‘compromise’ where repayment has already commenced as per the agreed terms, are not eligible. However, if a defaulter has failed to abide by the terms of the settlement through a ‘compromise’, he/she can take the route of the OTS scheme.

It is to be noted that in the cases under process through the ‘compromise’ route and where the offer amount is on higher vis-à-vis the OTS amount will not be eligible. Even the defaulting units under rehabilitation/ restructuring too fall outside the ambit of the scheme. However, units where rehabilitation/ restructuring have failed are eligible. There are also cases decreed by the court in favour of the bank, which are not eligible under the OTS scheme.

What is the percentage of relief granted under the scheme?

As per the settlement formula of the scheme, NPA outstanding Balance as on September 30, 2021 would be taken into account for calculating the amount of relief. Debits raised in the account on behalf of the borrower due to devolvement of LC/invocation of BG, additional loans in case of active accounts will be added to this amount, to arrive at a net outstanding. The one time settlement amount would include 85% of the secured portion of (NPA outstanding equivalent to the value of primary and collateral security) 40% of the Unsecured portion (outstanding in excess of the value of primary and collateral security). The realizable value of securities as per the latest valuation report will be considered for calculation of secured portion and unsecured portion of outstanding.

Precisely, entire unapplied interest from date of NPA in respect of all eligible accounts will be waived. Besides, all legal and other expenses will be waived under the scheme. Remarkably, permissible waiver in NPA (Principal) balance on secured portion of outstanding (i.e. Outstanding equivalent to the value of primary and collateral security) will be 15%. Permissible waiver on unsecured portion of the outstanding (i.e. Outstanding in excess of value of primary and collateral security) will be allowed to the tune of 60%.

What is the payment schedule for the defaulter after arriving at a settlement under the scheme?

In the first instance, the borrower has to deposit 15% of the OTS Amount at the time of submission of application. Otherwise, the application will not be processed. In case the bank rejects the application, such payment will be refunded without interest within three months.

Then the borrower has to deposit another 15% of the OTS Amount as first installment within thirty days from the date of sanction of OTS. Another 20% as second installment is to be deposited within sixty days from the date of sanction of OTS.

The remaining 50% is to be paid within sixty (60) days. However, the amount (Beyond 50%) can also be paid within 6 months from the date of sanction of OTS (the validity period) together with interest @ 6 months MCLR on reducing balance basis effective from the date of sanction of the OTS.

Notably, any deviation on part of the borrower in the payment scheduled arrived under the OTS will see the settlement cancelled.

Any other incentive under the scheme?

The OTS scheme offers further incentive of 5% on OTS amount to the borrowers who make full payment within one month from the date of sanction. Those paying the settlement amount with two moths would be granted 2% incentive on the OTS amount.​

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The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK