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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 micro, small, and medium enterprises (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 category of borrowers is individual borrowers, small businesses and MSMEs."

Against this backdrop, let us take a look at matters to be kept in mind while considering oropting for a moratorium or loan restructuring.

Conditions

Loan restructuring is available for those classified as “Standard" as on 31 March 2021. The borrowers can apply for it until 30 September. Lenders will need to approve and implement the plan within 90 days of invocation.

Lenders' prerogative

When opting for restructuring, borrowers impacted due to the second covid-19 wave must bear in mind that it is not mandatory for lenders to offer restructuring to borrowers. They have the prerogative to accept or reject the loan.

“Before considering any loan restructuring, bear in mind that it is the lender’s prerogative—and not yours—to decide your eligibility for a restructuring plan and the terms and conditions of the same. The RBI announcement merely permits the bank to consider restructuring. It does not mandate the lender to go ahead and restructure your loan on your request," said Adhil Shetty, chief executive officer at Bankbazaar.

There is a cost attached

Even if a lender offers a loan restructuring, it comes at a cost; it increases the interest outgo on loan. “Opt for the restructuring plan only as a last resort. Any moratorium or tenure extension will only provide temporary relief and increase the overall interest obligation on your restructured loan. It could make it doubly difficult if your income channels remain impacted for a long time," said Shetty.

Earlier, banks 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.

Impact on credit growth

Borrowers must also keep in mind that loan restructuring will impact their credit score, and consequently, their loan eligibility. RBI had asked banks to report such cases as “restructured" to credit bureaus in the earlier restructuring. Loans reported as restructured hurt the credit scores of borrowers.

If a borrower has two or three credit lines with a bank and opts for recasting debt of 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 the credit card outstanding. The lender will report all three as restructured.

Those who availed restructuring earlier

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 today’s 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 availing of restructuring, keep in mind that the lender has the prerogative, the cost attached and the impact on credit score.

Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts.

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