Keep the costs and impact on credit rating in mind when choosing a loan restructuring

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The Reserve Bank of India (RBI) has cleared banks to restructure loans under its new 2.0 resolution framework for covid-stressed assets of individuals, small businesses, and micro, small and medium enterprises (MSME).

In his speech, RBI Governor Shaktikanta Das said: “The containment measures adopted at the local / regional level created new uncertainties and had an impact on the nascent economic recovery that was taking shape. In this environment, the most vulnerable category of borrowers are individual borrowers, small businesses and MSMEs. “

Against this background, let’s look at the points to keep in mind when considering or adopting a moratorium or loan restructuring.

Terms & Conditions

Loan Restructuring is available to those rated “Standard” as of March 31, 2021. Borrowers can apply until September 30. Lenders will need to approve and implement the plan within 90 days of the invocation.

Prerogative of lenders

When choosing a restructuring, borrowers affected by the second wave of covid-19 should keep in mind that it is not mandatory for lenders to offer restructuring to borrowers. They have the prerogative to accept or refuse the loan.

“Before considering a loan restructuring, keep in mind that it is the lender’s prerogative – not yours – to decide whether you are eligible for a restructuring plan and its terms and conditions. The RBI’s announcement simply allows the bank to consider restructuring. It doesn’t force the lender to restructure your loan at your request, ”said Adhil Shetty, Managing Director of Bankbazaar.

There is an attached cost

Even if a lender offers a loan restructuring, it comes at a cost; it increases the amount of interest on the loan. “Go for the restructuring plan only as a last resort. Any moratorium or term extension will only provide temporary relief and increase the overall interest obligation on your restructured loan. This could make it doubly difficult if your revenue channels remain impacted for a long time, ”Shetty said.

Previously, banks also charged restructuring costs. Some offered the restructured loans at a slightly higher interest rate. Borrowers should therefore opt for debt restructuring if they are unable to repay their loans without restructuring assistance.

Impact on credit growth

Borrowers should also keep in mind that restructuring loans will affect their credit rating and, therefore, their eligibility for the loan. The RBI had asked banks to report these cases as “restructured” to the credit bureaus in the previous restructuring. Loans flagged as restructured hurt borrowers’ credit ratings.

If a borrower has two or three lines of credit with a bank and opts for debt restructuring from even one loan, the lender will report all three as restructured to the credit bureaus. Suppose a borrower has an auto loan, personal loan, and credit card from the same financial institution. He opts for the restructuring of the outstanding credit card. The lender will report all three as restructured.

Those who benefited from the restructuring earlier

RBI has authorized lenders to change the moratorium and restructuring made available to clients in August 2020. As a result, they can now extend the moratorium or remaining term to a total of two years in case the term was longer. short last time.

Let’s say a borrower has opted for a 10-month moratorium. For this reason, the remaining term of the loan has increased by six months. Based on today’s announcement, lenders can increase the moratorium so that the remaining term can increase up to two years depending on the original repayment term.

If you are planning a restructuring, keep in mind that the lender has the prerogative, the cost attached and the impact on the credit rating.

Do you have questions about personal finance? Send them to [email protected] and get them answered by industry experts.

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