Why opting for loan restructuring is a good idea?

The Government of India, the Reserve Bank of India (RBI), and the judicial institutes of our country have, time and again, come up with policies and rulings that try to help out those who have been financially affected by the Covid-19 pandemic. The recent RBI Resolution Framework – 2.0 is one such move to assist individuals and businesses whose loan repayment ability has been hampered due to the pandemic. Through this resolution, RBI has directed lending institutions to offer loan restructuring options to such borrowers.

What is loan restructuring?

Loan restructuring is one of the ways to avoid defaulting on your debts. This method involves negotiating with the lender for lower interest rates, extending tenure, or both.

Top 4 Benefits of Opting for Loan Restructuring

1. Temporary reprieve from high financial obligations
   1. Extension of tenure reduces your current EMI
   2. Reduction in the monthly payouts can help you stay afloat
2. Opportunity to channel your limited funds to more effective purposes
   1. The savings can be invested back into your business or invested
   2. The extra interest paid will then seem like a low cost to be borne for this additional fund
   3. The returns on investment if higher than the interest charged can mean profits
3. Escape from ‘defaulter’ status
   1. Default in a single credit facility can lower your credit score
   2. Nonpayment of dues for more than 90 days can cause your loan to earn Non-Performing Asset (NPA) status
   3. NPA status of a single credit facility will cause all your credit with the same institute to be identified as NPA, sending your credit score into a downward spiral
   4. Reduction in credit score means higher interest in your next loan or even rejection of loan application in the future.
4. Minimal impact on ‘credit score’
   1. Your credit report will reflect the “Restructured” remark
   2. Increase in the overall debt plus this remark might have a negative impact on credit score
   3. However, timely repayments as per the revised schedule will reverse the impact over time

3 Points to Ponder Upon while Opting for Restructuring

1. Extension of tenure –
   1. Opting for the loan restructuring will stretch your loan tenure.
   2. Credit utilization will be higher for that extended tenure
   3. Capacity to raise additional funds via debt might be limited for that extended period.
2. Increase in Interest Payable:
   1. Extended repayment period will mean paying interest during that extra period
   2. With interest payment holidays, the overall interest on the loan gets accumulated
3. Record in your Credit Report
   1. The ‘restructured’ remark in your credit report might be a detriment while applying for loans atleast in the short-term

Who is eligible for restructuring under this RBI Resolution Framework 2.0?

The loan restructuring option is for borrowers whose loan repayment capacity has been adversely affected due to a loss of job or income necessitated by the Covid-19 pandemic. Some other criteria include:

1. borrowers who have availed loans with aggregate exposure of less than Rs. 25 crore with the same lender as of March 31, 2021
2. borrowers whose account has been classified as ‘standard’ i.e. there has been no overdue as of 31st March 2021
3. borrowers who did not opt for the resolution framework announced in August 2020

Conclusion –

If you are finding it difficult to fulfill your financial obligations due to a lack of funds, this temporary reprieve will definitely help you in the long term.

However, before applying for this scheme, do weigh all the pros and cons. 

If you need help deciding whether the loan restructuring offered by your bank is the right choice for you right now, feel free to reach out to our Debt Counsellors, we help you get better at credit management.