In 2020, the RBI had announced a loan restructuring program. And then in May 2021, due to the second wave of Covid-19, it announced a second resolution framework for individual borrowers.
Here is what you need to know about the second loan restructuring program; find out who can opt for it, how the process works and if you should avail it.
Who is eligible for second restructuring?
This restructuring is primarily focused on offering relief to those borrowers who have not opted for any loan restructuring in the past and have been making regular repayments.
“Retail loans availed by individual borrowers, who have not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 as announced by RBI vide its guidelines dated August 6, 2020) and whose accounts were classified as ‘Standard’ as on March 31, 2021 can be considered for restructuring under Resolution Framework 2.0 as announced by RBI on May 5, 2021,” says Anil Pinapala, Founder & CEO of Vivifi India Finance, a non-banking finance company.
If a borrower doesn’t repay the loan on time, then it is treated as a defaulting account and categorised as substandard after a certain period. It is essential for you to know that after how many repayment lapses or days the loan account loses the standard tag. “Typically, a loan account is declared as defaulting if the repayment is not made for 90 days or more,” says Gaurav Chopra Founder & CEO of IndiaLends, an online lending platform. It means that if you do make the monthly repayment for 3 months continuously, the loan account will be categorised as substandard.
What kind of loans are eligible
In terms of products all popular credit products are eligible for restructuring. “All retail loans like home loans, top-up home loans, personal loans, car loans, education loans, and gold loans can be restructured as per the scheme,” says Chopra.
HDFC Bank, on its website, under the retail credit category has listed eligible credit facilities as Credit Card receivables, Auto Loans and Two-wheeler Loans, Personal Loans (both for personal use and for business / commercial purposes), Personal Loans to professionals, Education Loans and Loans given for creation/ enhancement of immovable assets (e.g., housing loans).
However, credit facilities provided by lending institutions to their own employees are not eligible for resolution under this framework.
What are your options under restructuring?
“Moratorium for payment of interest and/or principal with or without extension of the remaining term subject to the maximum stipulated in the scheme, is offered in the case of term loans,” says Babu K A, Senior VP & Head, Loan Collection & Recovery Department, Federal Bank.
What it means is that you can apply for a complete holiday of any repayment be it principal or interest up to a total moratorium period of two years. You can also opt to pay only the interest part during the moratorium period. After the moratorium you can stick to the original tenure of the loan with accelerated repayment with higher EMIs, else you can apply for extension of tenure to make the repayment more affordable after the moratorium.
Alternatively, you can opt for a tenure extension without having any moratorium at all, and this is what many borrowers are going for. “Tenure extension / moratorium for term loans is opted by a good number of eligible borrowers,” says Babu.
| Impact of EMI holiday on a Rs 5 lakh auto loan outstanding | ||||
| Current remaining Tenure | 5 years | 5 years | 5 years | 5 years |
| Existing EMI | Rs 10,624 | Rs 10,624 | Rs 10,624 | Rs 10,624 |
| Holiday period for not paying EMI at all | 1 year | 1 year | 2 years | 2 years |
| Accrued interest after moratorium | Rs 52,357 | Rs 52,357 | Rs 1,10,195 | Rs 1,10,195 |
| Outstanding principal after moratorium | Rs 5.53 lakh | Rs 5.53 lakh | Rs 6.10 lakh | Rs 6.10 lakh |
| Original tenure extended | No | 1 year | No | 2 years |
| Remaining Tenure after moratorium | 4 years | 5 years | 3 years | 5 years |
| Revised EMI | Rs 14,009 | Rs 11,736 | Rs 19,689 | Rs 12,965 |
| Total Additional Interest Payment | Rs 35,030 | Rs 66,745 | Rs 71,403 | Rs 1,40,480 |
| Interest Rate 10% p.a. on monthly balance | ||||
| Impact of principal repayment holiday on a Rs 30 lakh home loan outstanding | ||||
| Current remaining Tenure | 10 years | 10 years | 10 years | 10 years |
| Existing EMI | Rs 36398 | Rs 36398 | Rs 36398 | Rs 36398 |
| Holiday period for only interest payment | 1 year | 1 year | 2 years | 2 years |
| Monthly Interest Payment during holiday | Rs 20,000 | Rs 20,000 | Rs 20,000 | Rs 20,000 |
| Original tenure extended | No | 1 year | No | 2 years |
| Remaining Tenure after moratorium | 9 years | 10 years | 8 years | 10 years |
| Revised EMI | Rs 39,056 | No change | Rs 42,410 | No change |
| Total Additional Interest Payment | Rs 90,270 | Rs 2.4 lakh | Rs 1.84 lakh | Rs 4.8 lakh |
| Interest rate 8% p.a. on monthly balance | ||||
Any extension or moratorium means higher interest outgo
Do keep in mind that whether you opt for tenure extension or a moratorium on EMI or principal repayment it will result in overall higher interest outgo. This is because a lesser or no principal repayment during the moratorium or extended period will lead to higher outstanding for a longer period. Therefore, the interest that is charged on this higher outstanding will be higher.
The only way you can minimise the additional interest payment is that you serve at least the interest during the short moratorium and restructure the loan in such a way that it gets repaid within the original tenure. For instance, in the example above, if you go for a moratorium of 1 year on principal repayment by paying only monthly interest and get one year tenure extension your overall additional interest payment is Rs 2.4 lakh. However, if you do not extend the tenure and start paying higher EMI after moratorium your additional interest outflow will Rs 90,270.
Will only commercial banks offer restructuring?
Are loans taken from co-operative banks and non-banking finance companies (NBFCs) eligible for restructuring? “RBI has authorised all lenders including commercial banks in India, public sector banks, private banks, foreign banks, state co-operative banks, urban co-operative banks, regional rural banks, district co-operative banks, housing finance companies and NBFCs to use this facility with forbearance,” says Chopra.
How long will take for your application to be processed
While you may be eligible to apply for the resolution, however, it will be up to the lender’s discretion to accept your request. Similar to processing of your new loan application the lenders may seek additional information while processing your restructuring request to ascertain how pressing your need and what best they can offer in your case.
What if borrower has already availed first restructuring?
The borrowers who availed the restructuring facility in 2020 can also get relief under second restructuring if there is a scope for it. “The overall caps on moratorium and / or extension of residual tenor granted under Resolution Framework – 1.0 and this framework combined, shall be two years,” says RBI notification.
If the total moratorium availed by the borrower was less than two years and such borrower was making regular repayments till March 31, 2021 as per the new restructured terms, then he/she can apply for extension of moratorium in such a way that total moratorium period including the last one is up to 2 year. So, if a borrower got 6 months moratorium last time, he/she can be eligible to get an additional moratorium of up to 1 year 6 months.
Will it impact your credit score?
One of the most critical factors that can impact the borrowers going for a loan restructuring under the new resolution plan is their credit history and credit score. While these borrowers will not be put in the general default category, however, their credit history will reflect the restructuring of credit.
“Reporting to credit information agencies will be continued, incorporating a tag “Account restructured under COVID 19,”. The impact on credit score will be in such a way that the revised score after restructuring will be less than that of a standard account without arrears but more than a standard account with long arrears or NPA. Hence, between restructuring and being termed as an NPA (i.e., defaulting on the loan repayment), the better option is restructuring on two counts – ease on repayment obligation timelines and credit score,” says Babu.
Challenges in getting loans in future
While most borrowers opting for restructuring are victims of an adverse economic situation which was beyond their control, however, it will have an implication on the ease of access to credit in the future.
“Impact of COVID-19 is a universal situation and vast majority of individuals & businesses are affected and are resorting to restructuring of their debts. In future, for considering a new exposure, lending institutions may not give heavy weightage for COVID-19 related impact and further reduction in credit rating but would assess the then existing business scenarios with future cash flow and viability,” says Babu.
Should you go for restructuring?
Restructuring has its cost in terms of higher interest payment and impairment of credit history to some extent.
So, you should take the call about going for the restructuring after thorough analysis and only when you are confident about your future income and can stick to the revised repayment schedule. Because if you default it will have serious implication in terms of cost and future access to credit.
“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,” says Chopra.
