The Indian population is by now well acquainted with the setback that Banks and Financial institutions have faced due to the Pandemic where failure in repayments of loan continues to be an aggravating problem. To rescue the ailing sector from credit default risk issues the Reserve Bank of India has proposed a one-time loan restructuring solution for personal and corporate loans. Borrowers of personal loans with regular payment history till March 2020 can now have their loan restructured via a framework formulated by the lending bank. Lenders are permitted to retain such loan classification as “standard” which will provide buffer to their non-performing assets. They will, however, be required to be classified as “restructured” for reporting to the credit bureaus. Banks will have to finalize an applicable framework by 31st Dec 2020 for their one-time loan restructuring service. Defaulted loans for more than 30 days preceding 1st March 2020 are ineligible under this program. As per loan specialists, with this one-time loan restructuring program, banks can now reschedule the loan repayments, convert the accrued interest to an alternate credit facility, extend the moratorium of existing loans for up to two years as well as extend the loan tenor. This one-time loan restructuring will be done by banks after evaluating the repayment ability of the borrower.
For the MSMEs too the RBI had earlier rolled out a program, applicable to only those with an outstanding debt of up to Rs 25 crore and the same is still under implementation. The new scheme is applicable to MSMEs with outstanding of more than 25 crores to be implemented before March 2021. Banks are additionally also instructed to keep aside provisions worth 5% of the amount. In the case of a corporate loan, the restructuring plan allows the conversion of a part of debt into equity or alternate non-convertible securities. Corporate loans restructuring plans will need to be implemented within 180 days of approval and an Inter Creditor Agreement needs to be duly signed by all lending institutions in case of multiple lenders within 30 days of invocation, failing which banks have to make provision of 20% loans as compared to 10% otherwise.
Borrowers no longer have to worry about paying off their debts as per repayment schedule stipulated at the time of availing the loan. Their payment ability will be assessed by banks as per current fund flow and payment capacity. So, all borrowers who have taken the blow of a job loss or salary cut can hugely benefit from this one-time loan restructuring program. Borrowers now can either repay the pending EMIs through a single transaction or can have them distributed across the existing EMIs. The accrued interest during the moratorium too can now be converted to a separate loan. Borrowers also have the option of not changing the EMI figure but rather extending the loan tenure.
One-time loan restructuring plan however has its own demons within. Most concerning drawback is the negatively impacted credit scores and future loan eligibility, since the credit-score calculating algorithm remains unchanged. To add to the borrower’s woes the lender would report all the various loans taken through them as “restructured” even though the borrower has opted for this facility to be applied on only one of the loans. The interest that a lender loses out during the restructuring period gets accumulated with the principal, elevating the overall interest payable. A dip in credit score seems to be unavoidable if opted for one-time loan restructuring plans. In short, the borrower eventually would end up paying more since this involves a fee payable to the lender along with a possible hike in the rate of interest. However the Supreme Court has recently provided some concession with relief for small category of borrowers directing the banks to refund the interest portion to the eligible borrowers.
At present, the program of one-time loan restructuring seems more favorable towards lending banks and FIs since they are maintaining these loans as “standard” loans in their books and preventing the accumulation of NPAs. Whereas borrowers will need to pay a fee for one-time loan, handle the financial burden, and yet witness their credit scores dipping.