The Reserve Bank of India (RBI) has allowed banks to restructure loans under its new Resolution Framework 2.0 for Covid Related Stressed Assets of Individuals, Small Businesses and MSMEs.
In his speech, RBI governor Shaktikanta Das said, “Containment measures adopted at local/regional levels have created new uncertainties and impacted the nascent economic revival that was taking shape. In this environment, the most vulnerable segments are individual borrowers, small businesses and MSMEs”.
“RBI has made a bold attempt to not only minimize the likely distress in the banking system but also improve the confidence among marginal borrowers by giving them more time, thereby reducing widespread defaults,” said Neeraj Dhawan, managing director, Experian India, a credit bureau.
Conditions apply: The loan restructuring is available for those classified as ‘standard’ as on 31 March. The borrowers can apply for it until 30 September. Lenders will need to approve and implement the plan within 90 days of invocation.
The circular said banks should have a board-approved policy in place within four weeks, or by 2 June. Banks must offer relief only to those who are impacted due to covid. Like in the earlier restructuring, borrowers will need to back their applications by submitting documents such as job loss or pay cut to prove that the pandemic has affected their income. This time, RBI has also instructed banks to upload the board-approved policy on their websites.
Lenders can offer “rescheduling of payments, conversion of any interest accrued or to be accrued into another credit facility and granting of moratorium as part of the restructuring”. Banks could base this decision on the assessment of the income streams of the borrower.
RBI has not permitted settlements as part of the resolution plan. Banks will need to report such settlements as non-performing assets or NPAs. In a settlement, lenders allow delinquent borrowers to pay a specific amount to close the loan. Typically, lenders could waive off penalties, charges and some interest portion and ask the borrower to repay in one or two installments. Lenders can only grant relief in a manner that the total extension is up to two years.
Lenders’ prerogative: When opting for restructuring, borrowers must bear in mind that it is not mandatory for lenders to offer the same. They have the prerogative to accept or reject the application.
“Bear in mind that it is the lender’s prerogative—and not yours—to decide your eligibility for a restructuring plan. The RBI announcement merely permits lenders to consider restructuring. It does not mandate the lender to go ahead and restructure your loan on request,” said Adhil Shetty, CEO, Bankbazaar.
Cost attached: Even if a lender offers a loan restructuring, it comes at a cost. Tenure extension or moratorium will increase the interest outgo on the loan. “Opt for the plan only as a last resort. Any moratorium or tenure extension will only provide temporary relief and increase the overall interest obligation. It could make it doubly difficult if your income channels remain impacted for a long time,” said Shetty.
Earlier, lenders also charged a fee for restructuring. Some offered the restructured loans at a slightly higher interest rate. Borrowers should, therefore, opt for debt recast if they are unable to repay their loans without restructuring support.
Credit score: Borrowers must also keep in mind that loan restructuring will impact their credit score, and consequently, their loan eligibility.
If a borrower has two or three credit lines with a bank and opts for recasting debt even one loan, the lender will report all three as restructured to credit bureaus. Suppose a borrower has an auto loan, a personal loan and a credit card from the same financial institution; he opts for restructuring on the personal loan. The lender will report all three as restructured.
Previous cases: RBI has permitted lenders to modify the moratorium and restructuring made available to customers in August 2020. As a result, they can now extend the moratorium or the residual tenure up to a total of two years in case it was for a shorter duration last time.
Say a borrower opted for a 10-month moratorium. Due to this, the remaining loan tenure went up by six months. Based on the new announcement, the lenders can increase the moratorium in such a way that the remaining term can increase by up to two years based on the initial repayment tenure.
If you are going for it, keep in mind that the lender has the prerogative, the cost attached and the impact on credit score.