In simple words, Funded Interest Term Loan (FITL) is giving a loan for repaying an existing loan. It’s a kind of loan restricting mechanism whereby lender would give the borrower money to repay the interest component of the loan. It is an ingenious tool recently brought out by RBI in order to tackle the growing NPA burden in India. The idea is to give companies breathing space to repay the loan by getting a moratorium. In this way, the pending amount to be recovered could be a recovered and FITL could be considered a blessing.
Some notable points for FITL are as follows:
1. What is FITL?
It is giving loan for repaying a loan. Here, a lender gives the borrower money to repay the interest component of the loan.
2. Why should banks give loan to a company to repay its dues?
When a company faces a severe financial crisis, it is not in a position to meet its loan obligations. However, if the lender is convinced that the project is viable and the borrower did not divert the earlier loans, it recasts the loan factoring in the inability of the promoters to repay even the interest component.
In such a situation, the loan is restructured based on the cash flow wherein the bank provides additional loan to the borrower, which can be used to repay the interest component of the original loan.
3. What is the benefit of taking an FITL loan when the borrower has to pay anyway?
The borrower gets a breather to repay the loan, while the bank may be able to save the account from turning into an NPA.
4. Does the Reserve Bank allow such loans?
Under the debt recast scheme, RBI allows banks to offer FITL to borrowers. The RBI norms say that FITL should be given the same asset classification as that of restructured loans. Further, the upgrade or downgrade of a restructured loan will be applicable to FITL as well.
5. How often do banks give FITL to borrowers?
FITL is usually a part of deep restructuring, which involves longer-than-usual repayment terms, lower interest rates and a moratorium on repayment. The unpaid interest component of an existing loan is usually carved out as FITL on which the bank gives the borrower a moratorium.
6. What happens if the borrower fails to repay FITL?
In such a case, the lender would have no option but to classify the account as an NPA.