One time restructuring of loans - What does it mean?

In light of the financial crisis caused by the Coronavirus pandemic that has significantly slowed down the economy in the past six months, the Reserve Bank of India (RBI) has announced a one time only restructuring of loans. This article highlights everything you need to know about the loan restructuring facility.

The restructuring of loans in this context refers to the Reserve Bank of India allowing loan restructuring without classifying them as non performing loans. This one time only facility is available for both businesses as well as individuals. Let’s understand more about this scheme.

Under this facility, COVID-19 hit borrowers will be able to change the terms of their loan payment and avail of a moratorium to pay off their loan amount or a loan holiday. As such, borrowers who are overdue on their payments by 3 months or 90 days will no longer be tagged and classified as non performing loans. This facility provides relief to borrowers without putting the cash flow of financial institutions in jeopardy.

At present, the Reserve Bank of India is allowing all public banks, private banks, foreign banks operating in India, small finance banks, regional rural banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks, non banking financial corporations, housing finance companies, and all-India financial institutions to restructure loans under this scheme.

Not all loans are eligible for restructuring and borrowers availing of this facility need to be fulfilling all of the following eligibility criteria:

The one time loan restructuring facility is only available to those borrowers who have been making regular repayments on their loans. It is also applicable to those borrowers who have not had an overdue in their loan instalment payments for more than 30 days as of March 31st, 2020. The borrower should be genuinely impacted by the COVID-19 related economic slump. This facility is only available for personal and corporate loans.

What happens when you opt for restructuring your personal loan? If you, as a borrower, are eligible for the loan restructuring scheme offered by your financial institution, the institution will have a timeline of 90 days to implement the resolution plan. If this timeline is not met, then the financial institution will have to declare the loan as a non performing asset. Additionally, financial institutions may offer additional credit facilities to address the financial hardships of borrowers.

Will the moratorium period be extended? Highly unlikely. The moratorium period ended on August 31st 2020 and is unlikely to be extended. However, the one time restructuring of loans offered by the RBI is valid till the end of the year viz. December 31st 2020 for now. The Supreme Court is yet to hear moratorium related cases and will do so in the coming week. (September 28th 2020). It is only then that borrowers will be able to opt for a loan restructuring resolution.

Is it wise to opt for loan restructuring? For starters, opting for a loan restructuring scheme will in no way impact the borrower’s credit score so if you are worried about lowering your credit score or ruining it altogether, that won’t be an issue. That being said, anyone opting for loan restructuring will be reported to credit scores agencies. Once the loan resolution structure is finalized, borrowers can approach financial institutions to understand the workings of a loan restructure and resolution process. It is recommended that only borrowers facing genuine hardships while repaying their loans should consider opting for a loan restructure. Others who are not being crushed under debt, should continue to repay their loans.

How can Finwisely help you? Finwisely can help walk you through the loan restructuring process and help you understand if you are eligible to avail of such a facility. We can also discuss other options if you are not in favour of opting for a loan restructure form of resolution.