The Reserve Bank of India (RBI) has suggested new regulations where the banks and other regulated organisations are expected to come up with organised relief plans in case of a natural disaster. The draft framework is designed to assist the lenders in responding more quickly when borrowers suddenly become stressed. This is what we interpret as a bid to have disaster response be more systematic. The proposal would require the banks to consider the risks of climate and calamities when developing credit policies. They will have to prepare plans for how to resolve them and sketch plans of relief. The central bank indicated that the framework would be principle-based, where lenders would have the freedom to design and implement the support in various ways.
The banks have been granted the freedom by the RBI to develop local solutions to local conditions. The lenders are able to evaluate the conditions of each of their borrowers and make decisions based on the assessment. Such flexibility can assist banks in meeting various interests among agricultural, small businesses, and households. The recent happenings demonstrate the necessity of such a structure. States such as Punjab and Assam have suffered losses of crops due to floods. There have been flash floods and landslides, which have destroyed homes and infrastructure in Uttarakhand and Jammu and Kashmir. These shocks interfere with the incomes and render loan repayments challenging for most of the families.
India is also in the first position of climate vulnerability in the world. The Germanwatch Climate Risk Index showed that the number of extreme weather events in the country had exceeded 400 between 1993-2022. The losses were approximately 80,000 deaths and losses worth almost 180 billion. In our opinion, these risks should be covered by organised financial protection. Various relief plans can be available in the proposed resolution plan. Banks may offer:
- Replans re-scheduling of loans.
- Restatement of the accrued interest to distinct credit facilities.
- Temporary moratoriums
- Further funding to bail out stressed borrowers.
These steps will remove the aspect of short-term strain without driving accounts into bankruptcy. The borrowers who are to be relieved should not owe more than 30 days of the disaster. This state stimulates prompt repayment habits even though it provides sufficient assistance to people who fell victims to unexpected circumstances. It is directed towards underwriting viable borrowers instead of concealing greater stress. The RBI intends to adopt the framework starting April 1st, and it has sought feedback from the stakeholders and general public until February 17th. We regard this consultation period as significant, as these rules will face different interpretations by the banks and the borrowers alike.
