Introduction 

The ongoing COVID pandemic has resulted in a financial crunch across the globe. While we may hope for it to be over, it will continue to have a negative impact on our finances, as millions of individuals are struggling with reduced salaries and a large number of people are rendered jobless. Keeping this in mind, the Reserve Bank of India has permitted all banks to restructure loans for those individuals who are facing a financial crisis due to the pandemic. This is intended to help them service existing loans as the blanket 6-month moratorium on all loans came to an end on August 31, 2020. However, few conditions have to be met for availing the facility of loan restructuring.

RBI announced that borrowers who have been consistently repaying up to March 2020 can avail loan restructuring benefit via a framework which can be designed by the respective bank. As per the RBI, banks must design a framework before December 31, 2020. Banks are required to implement this within 90 days from finalisation of the framework. Loans which have been defaulted beyond a timeframe of 30 days as of March 1, 2020, are not to be considered under restructuring benefit.

Loan experts believe that under the restructuring plan, rescheduling of loan repayments can be announced by individual banks. It also includes converting of interest accrued or yet to be accrued into a separate credit facility. Extension of loan tenure and extension of the moratorium for two years is also covered under this. This is dependent on the current repayment ability for eligible borrowers. In this article, you can find all that you need to know about the one-time restructuring offered by RBI. 

Which loans are eligible for one-time restructuring?

As per the RBI's notification, loans which are classified as standard, but are not defaulted beyond 30 days, as of March 01, 2020, are eligible for loan restructuring. It is important to note that all retail loans such as home loans, personal loans, car loans, top-up home loans, education loans and also gold loans are allowed to be restructured under this scheme.

For borrowers who find it difficult to service their EMIs, they can approach the lender or bank and request for loan restructuring. However, they may be required to furnish documentation supporting such contention that there has been a financial impact resulting from the pandemic. This is because the loan restructuring option is only available to those buyers who are impacted by the ongoing Covid-19 pandemic. Borrowers can either furnish the termination letter or documentation which shows a reduction in salary as a result of the pandemic. Self-employed individuals can also provide their bank statement or submit their GST return as proof of their loss of income resulting from the pandemic.

For those individuals who have not availed the moratorium, they can approach their lender for loan restructuring if there is a possibility that they will not be able to service the loan.

How does one-time restructuring by the RBI work? 

As per the RBI, banks can grant an extended moratorium of up to two years or the remaining loan tenure can be extended to reduce the EMI. Converting the remaining interest accrued throughout the moratorium period into another loan is also an option. However, the final loan restructuring could differ across banks depending on their policies and guidelines. Borrowers must apply for loan restructuring before December 31, 2020.

How individual borrowers can benefit from restructuring?

The loan restructuring scheme is intended to cover the majority of the existing loans granted to individual borrowers. It will help them in loan repayment as per their existing repayment capability instead of using their repayment ability at the time of borrowing of the loan. This will primarily help all those individuals whose salaries have been impacted due to the pandemic or individuals who lost their jobs and have no existing source of income.

RBI’s decision was announced when the six-month moratorium offered on Equated Monthly Installment (EMI) ended on August 31st this year. This means loan repayments would have begun from September 1st. Borrowers who chose the 6-month moratorium can repay it at one go or request lenders to add on to existing EMIs. They also have the option to convert interest accrued throughout the moratorium period into a different loan.

Apart from this, borrowers can retain their EMI as it is whereas the loan tenure can be extended. According to experts, borrowers must aim to pre-pay existing EMIs as soon as the next 12 months to do away with any additional debt expenses. Individual borrowers must try to pre-pay six EMIs on top of the existing EMIs through the next 12 months. This can significantly help them in bouncing back as far as the repayment plan is concerned and also get rid of debt much faster.

Impact of Restructuring on Credit History

Before offering any relief with regards to loan restructuring, lenders are most likely to go through your credit history to determine if there is a serious downturn in your credit profile. Once the bank feels comfortable, it will try to restructure your loan. Once they agree to restructure an existing loan, it will show up in your credit history. It will also hurt your credit score. This is still a better choice as compared to the impact of NPA on your credit score. Once your credit score reflects an NPA, it is difficult to bring your credit score back on track. 

Additional Reading: Key Points To Know About SBI Loan Restructuring

The Bottom Line

The success of loan restructuring is primarily dependent on how creatively the lenders can implement it. It is also to be seen how well the economic activities restart and consumer demand jumps back to pre-COVID levels. The slower the income generation and economic restoration, the elongated the pain of borrowers who are impacted by COVID. 

RBI and also the government must take requisite steps as far as capitalization of PSU banks is concerned. This will help them to focus on offering relief to various beneficiaries instead of worrying about exceeding their capital thresholds due to increasing NPA.