What is Loan Restructuring?
A restructured loan is a loan the terms of which are changed, often to benefit borrowers who are undergoing financial stress. In doing so, such borrowers can avoid default and achieve some level of flexibility in paying off their loans. The alterations made to the terms of the loan include rescheduled EMIs, lower interest rates or converting interest into another loan.
Pandemic and RBI’s Restructuring Scheme
The pandemic has not only affected the lives of millions of people the world over, but also left a debilitating impact on the economy, with close to half of the world’s workforce facing the risk of unemployment. According to the International Monetary Fund (IMF), India’s GDP shrunk by 10.3 per cent in FY21 as a result of the pandemic.
Because of this, the Reserve Bank of India (RBI) has announced a plan for restructuring individual loans. The plan is aimed at helping a maximum number of retail borrowers who have faced losses of income or jobs, and are struggling with non-payment of their EMIs. These borrowers now have diminished repayment capacities, and under this plan, they can repay their loans based on their current capacity to pay back the loan.
The new terms of repayment will depend on the fresh agreement made between the bank and the borrower. As per the RBI’s plan – its first resolution plan for retail loans – borrowers can benefit from decreasing the rate of interest due, rescheduling EMIs, allowing loan moratorium for up to two years, and converting the interest into another loan.
The RBI’s new plan is offered only to borrowers whose income has been affected negatively because of the pandemic, thereby shrinking their repayment capacity. This is unlike the loan moratorium scheme announced by the Centre that closed in August 2020. During the period of this scheme, the moratorium was open to all on term loans.
Impact on Credit Score
The plan may offer borrowers respite from their loan repayment obligations, but it is worth remembering that such loan restructuring may affect your financial health in the long run. When a loan is restructured, the borrower’s CIBIL report labels it as such. Moreover, this can negatively impact the borrower’s CIBIL score, thereby affecting their future prospects of getting a loan.
A borrower must opt for loan restructuring only if their income has been affected severely and no other options are left. Even when an individual does choose to repay their loans through this plan, they must pay off their EMIs in a strictly disciplined fashion and stick to the schedule and terms of the repayment. If borrowers follow through with their repayments with such discipline, the impact on their credit score could be minimal. Despite this, it is advised that borrowers continue to make their repayment EMIs, even if it poses some financial constraints. This will keep their ability to apply for and get more loans in the long run from being affected.
Conclusion
It is imperative to check CIBIL score before one can make important decisions regarding their loans. A detailed look at your CIBIL report is extremely important when considering whether or not to take advantage of RBI’s new loan restructuring plan. Finserv MARKETS offers a convenient way to check your CIBIL score and assess your credit report before you make such a decision.
