Thinking of getting your loan restructured? Here's what you should know

Retail borrowers should thoroughly weigh the benefits and costs of getting their loans restructured and make a calculated decision.

Business Desk, ETV Bharat: The economic disruption caused by the Covid-19 pandemic across the world has been unprecedented; so has been the resultant income and job loss. In such times, the one-time loan restructuring scheme as proposed by the Reserve Bank of India (RBI) is being seen as a much-needed relief for small borrowers whose loan repayment capacity have taken a major hit in recent months.

However, as they say, there are no free lunches. And this relief, too, comes at a cost. So it is important for retail borrowers -- who have availed loans like gold loans, education loans, home loans, personal loans, consumer durable loans, car loans or even credit card dues – to carefully examine the terms and conditions of the loan restructuring scheme before taking any decision.

Talking to ETV Bharat, Aarti Khanna, founder and CEO of AskCred.Ai, explains in detail the points that borrowers need to keep in mind before opting for loan restructuring. Based on her advisory, here’s a look at the key features of the scheme:

What does loan restructuring mean?

Loan restructuring is, basically, reworking of the contract between the lender and borrower in order to change the terms of debt repayment. For instance, restructuring of loans helps borrowers to delay repayment of the interest and principal amount, or repay loans over a longer period of time.

What is the purpose of RBI’s current loan restructuring scheme?

The purpose of RBI’s scheme is to help borrowers whose income has been adversely impacted due to the pandemic and whose repayment capacity has been seriously restricted thereafter.

The lenders would also benefit from this scheme as the loans restructured would not be classified as non-performing assets (NPAs), or bad loans, and would not add stress to the banks’ balance sheets.

Who are eligible?

The one-time restructuring scheme is applicable to only those borrower accounts which were classified as standard, and not in default for more than 30 days, as on 1 March 2020.

So, if you had already defaulted on EMI payments before 1 March 2020, you won’t be eligible for the new restructuring scheme.

Also, it is must for a borrower to prove that his/her income has been affected by the Covid-19 pandemic to opt for restructuring.

What options are available under loan restructuring?

Lenders may provide relief to impacted borrowers by rescheduling loan repayments, converting any interest already accrued or to be accrued in future into another loan or by granting loan moratorium (also known as EMI payment holiday) subject to a maximum of two years.

How will restructuring increase the cost of repayment of your loans?

Given that the restructured loans have a higher repayment period and may also have a repayment holiday, or a moratorium, the interest would have to paid for an extended duration, thereby increasing the cost of loan repayment.

Also, restructured loans usually have a processing fee (a percentage of the loan amount) and come at a higher interest rate than the current loan.

Can multiple loans be restructured?

Yes. Borrowers can get multiple loans restructured if they fulfil the above-mentioned eligibility conditions. They can check with the lenders and rework the repayment plans of all their credit facilities.

Can borrowers who did not opt for moratorium earlier get their loans restructured?

Even if the borrowers did not opt for the six-month moratorium offered by RBI earlier (that ended on 31 August 2020), they can still go for loan restructuring.

How can borrowers start the process?

Borrowers who are facing challenges in repayment due to Covid can approach their lenders and get a restructuring plan sanctioned before 31 December 2020.

For that, they need to submit documents like latest salary slips (salaried), or profit & loss account statement (self-employed) etc. Banks will then verify these requests and implement the resolution plan within 90 days.

The restructured loan will continue to remain standard till the time the borrower conforms to the resolution plan.

Will your credit score be affected if you opt for restructuring?

Borrowers should know that the loans taken up for restructuring will be reflected in credit reports as ‘restructured’. This may have some an adverse impact on credit score and borrowers’ chances of availing another loan or credit card may reduce significantly in the future, at least till the time the current loans are repaid.

Other things to keep in mind if you opt for restructuring?

Restructuring may bring a great relief now, but any default in future could prove costly. If thereafter the borrower misses a single payment, the lending institution will follow up from the first month itself and recurrent non-payment will land the borrower in deeper debt trap and also severely impact the overall credit profile of the borrower.

Apart from that the borrower may even lose the collateral pledged in case of a secured loan. Co-applicants and guarantors’ credit profile can also be severely impacted at the same time.

So, should you opt for restructuring at all?

Restructuring of a loan is an extreme option. And only borrowers who are genuinely hit should consider this facility. Borrowers are advised to repay and regularise their loans if their financial status is stable or if they have any savings to tap. Otherwise, if the repayment is truly not possible, then the restructuring scheme can prove to be a saviour.