Extending the loan term with or without changing the interest rate might start the loan restructuring process. This technique relieves borrowers by reducing the EMI load by spreading the principal payable amount over a longer payback period. Converting all accrued interest to a new loan account, offering a moratorium, or lowering the interest rate is another restructuring of loan options that can help a distressed borrower. Which technique should be used to restructure an eligible debt is up to the lending bank's judgment and the borrower's requirements?
Do you know?
According to Reserve Bank of India (RBI) directives, banks and other financial institutions can establish a restructuring of loans for their financially impacted consumers trapped in the economic fallout caused by the COVID-19 pandemic. The resolution plan may also allow extra credit facilities or a 2-year moratorium on the balance loan restructuring term.
Also Read: What is a Loan Agreement and Its Requirements?
Loan Restructuring Scheme
During the economic hardship caused by the Coronavirus, the six-month restructuring of loans brought much-needed respite to borrowers. It did, however, come to an end on August 31, 2020.
Nirmala Sitharaman, the finance minister, has instructed banks and NBFC to roll out a debt restructuring of loans scheme to help borrowers who the COVID-19 pandemic has financially harmed. Under this program, qualifying borrowers will be given more time to repay their loans without the debt being classified as non-performing. According to the Latest RBI circular on the restructuring of loans, banks may either give a further moratorium of up to 24 months/two years or prolong the outstanding loan tenure to decrease EMIs. Depending on the borrower's repayment capacity, the bank will move the outstanding interest accrued during the moratorium period to another loan.
However, depending on the policies of each bank, the loan restructuring will vary. Borrowers have until December 31, 2020, to seek loan restructuring.
Loan Restructuring Guidelines
The following loans are eligible for refinancing:
- This plan is only available to people and companies making regular payments and was not more than 30 days past due on their loans as of March 1, 2020.
- Customers have suffered financial losses or reduced income/cash flow due to the COVID-19 epidemic.
- Before issuing restructuring of loans, the bank or lender will assess the financial impact based on the documentation given. In addition, the customer's repayment history and the reasons cited by the customer when applying for a moratorium will be taken into account when determining restructuring eligibility.
There are a variety of loan restructuring guidelines, including:
- Reduction in the repayment period, which is frequently prolonged.
- Changes in the amount that borrower must repay
- Changes in the previously agreed-upon number of instalments
- A modification in the previously charged interest rate
- Additional loan provisions
- In other circumstances, the due date for settlement payments can be more than three months away.
Also Read: How to Find the Best NBFC Private Finance Loan and What Are Its Benefits?
What Is Loan Restructuring?
Even though most loans have a set repayment period, borrowers may find it difficult to repay their loans and the interest rate due to conditions such as the current epidemic. Rather than allowing borrowers to fail on their payments, financial institutions, with the assistance of the government, can implement modifications that make repayments easier.
Restructuring of loans means making modifications to the existing loan terms easier for the borrower to manage the repayment of the loan principal and interest. Debt should not be confused with loan refinancing, which we will discuss further. Loan restructure meaning is often preferable since it avoids the debt being classed as a non-performing asset (NPA), which affects the bank's profitability. Furthermore, it is less costly than allowing the defaulter to file for bankruptcy.
The latest RBI circular on the restructuring of loans has offered a one-time debt restructure to help borrowers experiencing financial hardship. After the six-month embargo period ended in August, the RBI allowed for a one-time debt modification. The RBI stated that personal loans would be considered for loan restructuring and standard loan accounts that have not been in default for more than 30 days as of March 1, 2020.
The regulator authorised banks and lending institutions to keep these loans on their books as "standard," which helps them reduce non-performing assets (NPAs). Previously, loan restructuring by banks helped to retain customers once they had become non-performing assets (NPA). Lenders only authorised loan restructuring if they were confident that the borrower intended to repay the debt but needed extra time and flexibility. To take advantage of the resolution plan, you must first determine whether your debt is eligible for restructuring.
- Loans taken out with non-banking financial institutions may be restructured.
- Commercial Banks, Small Finance Banks, Local Area Banks, and Regional Rural Banks, all Primary Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks, Non-Banking Financial Companies, All-India Financial Institutions are all eligible for the loan restructuring plan.
Benefits of Loan Restructuring
Restructuring of loans has several advantages:
- The moratorium can help existing recipients deal with the monetary crunch caused by the second wave of the Covid-19 outbreak and the lockout by allowing them to postpone EMI payments.
- Restructuring loans by the lender may be simpler for the borrower to repay the obligation, reducing overall NPAs for the lender.
- Once the lender restructures the loan, new beneficiaries may receive some relief in completing their EMI payments.
How Does Loan Restructuring by Banks Work?
When a company or individual is on the verge of going bankrupt, they strive to restructure loans. The debt restructuring procedure typically entails asking banks to agree to cut interest rates on loans or extend the period the individual or company's payments are due. These acts improve an individual's and a company's chances of repaying debts and staying in business.
Creditors are well aware that if a person or a corporation is forced into bankruptcy or liquidation, they will receive significantly less money. Because the company avoids bankruptcy, loan restructuring can be a win-win situation for all sides. The lenders make more money than they would have if the company had filed for bankruptcy.
Impact of availing loan restructuring on credit score:
- While loan restructuring may give borrowers much-needed respite, it is not all good news since one's credit scores will impact eligibility.
- While lenders can keep such loans as "standard" (lowering their non-performing assets or NPAs), restructuring of loans negatively influences borrowers' credit scores.
- The lender will record all of the borrower's loans as restructured, even if the borrower only applied for one loan to be restructured. Lenders frequently consider restructured debts willful defaulting because they are reported under the settled or 'written off' section.
- However, because this is a one-of-a-kind case, it's difficult to say how much a borrower's credit score will be affected. Previously, loan restructuring by banks was only authorised to restructure loans once they had become non-performing assets (NPAs).
- Although borrowers who want their restructuring of loans may not be able to avoid having their credit ratings harmed, they can attempt to improve their credit scores.
Latest RBI Circular on the Restructuring of Loans
Given the Covid-19 pandemic in India, RBI has prolonged the facility above for restructuring of loans without a downgrading in asset classification, subject to the following conditions:
- According to gazette notification S.O. 2119 (E) dated June 26, 2020, the borrower must be categorised as a micro, small, or medium-firm as of March 31, 2021.
- The borrowing entity is GST-registered when the restructuring of loans is implemented. This restriction, however, will not apply to MSMEs that are not required to register for GST. This will be decided based on the exemption limit in effect as of March 31, 2021.
- As of March 31, 2021, the total exposure of all lending institutions to the borrower, including non-fund-based facilities, does not exceed ₹25 crores.
- The restructuring of loans by borrower account takes place within 90 days of the invocation date.
- Suppose the borrower has not yet registered with the Udyam Registration portal. In that case, they must do so before the restructuring plan's implementation date for the plan to be considered effective.
- Following the restructuring of loans, the lending institutions must set aside 10% of the borrower's remaining debt.
- Lending institutions must implement a Board-approved policy on MSME advance loan restructuring under these instructions as soon as possible, but no later than one month after the date of this latest RBI circular on the restructuring of loans.
Conclusion
Loan restructuring is not always an option and is determined on a case-by-case basis. However, the latest RBI circular on restructuring loans had deemed a one-time reorganisation conceivable due to the pandemic's economic impact. Before choosing this choice, borrowers must carefully consider their financial condition and future needs. If you do not choose loan restructuring and fail to return the outstanding loan amount, you may be charged with default, reported to credit bureaus. The lender may then take action to recoup the loan amount. The loan restructuring option is only available until December 31, 2020. If you could not repay your EMIs due to a loss of work or income caused by the Covid-19 epidemic, may you use the debt restructuring option? Loan restructuring may incur additional fees, and while it may reduce your EMIs, you will be required to pay more interest owing to the longer term.
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