All You Need to Know About Loan Restructuring Scheme

What is a Loan Restructuring?

Loan restructuring is a process in which borrowers facing financial distress renegotiate and modify the terms of the loan with the lender to avoid default. It helps to maintain continuity in servicing the debt and gives borrowers a certain degree of flexibility to restore financial stability.

COVID 19 Impact

The economic fallout due to COVID-19 induced pandemic has resulted in severe economic hardship for millions of people. Seven months later, many are forced to work on reduced pay. Many others have not been able to find gainful employment after losing their jobs/business. 

For individual borrowers, the situation is more difficult. The RBI moratorium which was granted as a relief measure for pandemic affected borrowers for 6 months ended on Aug 31, 2020. Now, borrowers are expected to pay their EMIs as per the revised schedules post moratorium. However, for many, this continues to be a challenge in the face of continued loss of income.

Keeping the evolving situation in mind and people’s struggle, the Reserve Bank of India has announced a resolution plan or a one-time loan restructuring scheme allowing lenders to help affected borrowers by altering certain terms of their outstanding loans. This will provide borrowers with a little flexibility in terms of loan repayments, interest cost, and loan tenure depending on the type of agreement with the lender.

However, there are certain conditions attached to the loan restructuring scheme, based on which lenders will provide relief to affected borrowers. Let’s have a look at the various aspects of it and loan restructuring meaning.

Must Read: Different Types of Loans Available in India

Who Can Avail the Benefit of Loan Restructuring?

As per the RBI directives, it is a one-time restructuring scheme to change the repayment terms and will apply to individuals as well as MSME/corporate borrowers who have been financially affected by the COVID-19 lockdown.

1. For individuals, the loans restructuring scheme will apply to any type of personal loan given to individuals that consist of consumer credit, a loan taken for improvement and acquisition of house property, education loans, loan taken for investing in financial assets, etc.
2. Under the resolution plan approved by RBI, only those individual borrowers can avail of this facility only if the loan was not outstanding for more than 30 days as on 1st March 2020.

Therefore, if any loan is overdue for more than 30 days before the cut-off date, it will be already declared as a non-performing asset or an NPA. This period is 89 days for MSME borrowers.

A borrower’s eligibility for the loan restructuring scheme will depend on the following:

1. Impact of the pandemic in the form of loss of income/business.
2. Repayment capability based on various factors including your credit history.
3. Verification of documents provided and their subsequent evaluation by the lender.
4. The lender’s policy on loan restructuring.

What are the Benefits Offered through the Loan Restructuring Scheme?

As per the RBI directives, the lender can offer two options to borrowers- either provide a loan moratorium period of up to two years or extend the loan tenure to reduce the EMI payable as per the repayment capacity. However, the tenure extension (including moratorium if offered) cannot be more than 24 months. 

Further, the borrower can also transfer the outstanding interest amount into a separate credit facility to reduce the overall debt burden on the borrower. 

Also, the personal loan account will be kept as a “standard” account, not in default until the lender agrees to proceed with the restructuring plan. 

The lender will have 90 days with them to implement the loan restructuring resolution plan. If it fails to get implemented, the loan account will be declared as a non-performing asset.

What is the Cut-off Date for Loan Restructuring?

As per the RBI circular, the last date for applying to the loan restructuring scheme is 31st December 2020. However, this may vary across lenders, so it would be advisable to check with your lender to confirm.

What will be the Impact of Availing Loan Restructuring on Credit Score?

If the lender agrees to your loan restructuring scheme, it will have to be reported to the bureau, and your credit report will reflect this “Restructured” loan. There may be an impact on your credit score depending on the increase in your overall debt. However, this can get rectified through regular, timely repayments as per the revised schedule over a period of time.

Is Availing the Loan Restructuring Facility a Good Idea?

Availing the loan restructuring scheme comes at a huge cost for the borrower and in the long term, it can affect your finances. Here’s how:

1. Fee Charges: There may be a loan restructuring fee that needs to be paid
2. Increase in Interest Payable: As a restructured loan comes with a higher repayment period and interest payment holidays, the overall interest on the loan gets accumulated.
3. Increase in Tenure: If your monthly EMI reduces, your tenure will increase, which means that you will continue to be in debt for a longer period of time.

To understand this better, we encourage you to use our free loan restructuring calculator.

Loan Restructuring Scheme Application Process

Borrowers must note that to get your loan restructured

1. You will have to formally apply at your lender’s website (or through any of the prescribed channels as specified by your lender).
2. After they evaluate your application, they may agree to take the same forward, after which you will be asked to submit documents.
3. Only upon successful verification of the documents and the information on your application, as well as the lender’s assessment of your repayment capability, your lender may accept your request
4. Your lender will then discuss restructuring terms with you. If you agree to the terms, the revised schedule will be shared with you

Until the above process is completed, you should continue to pay your EMIs as per your current schedule. A failure to repay EMIs will be regarded as a default and will attract penalties and other charges accordingly. Please also note that:

1. This scheme will not get automatically applied to borrowers, irrespective of whether or not they had availed the 6-month moratorium facility.
2. The moratorium facility may not necessarily be granted under this scheme to all applicants - it will completely depend on your lender’s policy and your eligibility for the same. Therefore, even if you have applied for the loan restructuring facility, please ensure that you pay your EMIs as per the current schedule until your application process is complete and the schedule of the restructured loan is shared with you.
3. No extra line of credit will be given under this scheme.

Conclusion

Before applying for this scheme, do weigh all the pros and cons. Loan restructuring should be treated as a last resort option to manage your loan account. If you can pay your EMIs as per the current schedule by managing your budget, or through new sources of income, etc. then it is highly advisable that you do so. By repaying your EMIs on time and clearing off your loan quickly, your credit score will improve greatly, and your overall debt will reduce. This will enable you to avail loans in the future easily for any emergency or important personal/business needs.