You may have come across news reports of the RBI announcing the Restructuring of Loans 2.0. If you’re wondering whether you should go for the second restructuring, make sure to read this article first. In this post, we walk you through what the second restructuring is all about and why you should be cautious before you opt for it.
Restructuring 2.0: The New Loan Resolution Framework
The RBI (Reserve Bank of India) recently announced the new Resolution Framework 2.0 to provide relief for individuals, businesses and MSMEs stressed due to the second wave of the pandemic. The second wave of the Covid-19 pandemic brought untold financial and mental distress to millions of families across the country. In addition, the infection rates and death toll were significantly higher in the second wave than in the first wave.
States like Maharashtra, Delhi, Tamil Nadu, Kerala, Karnataka, and several others announced total lockdowns and partial curfews to control the pandemic. As a result, millions of individuals, especially daily wage earners, salaried employees and small businesses, lost their income or saw their income reduce significantly during the months of March, April and May.
To provide interim relief to individuals and businesses that suffered economic losses due to the second wave, the RBI announced the Resolution Framework 2.0. During the announcement of Restructuring 2.0, Shaktikanta Das, the RBI Governor, stated that various containment measures adopted at the state and local levels had created financial uncertainties for individuals and small business owners.
The most affected during the second wave of the pandemic are small businesses, MSMEs, salaried individuals and daily wage earners. To help the distressed, the RBI introduced the second restructuring similar to the first restructuring scheme introduced last year. This is a bold move from the RBI, which alleviates the distress of the economically affected and increases the confidence of businesses and marginal borrowers in the banking system.
The second restructuring scheme aims to provide borrowers with additional time to repay their ongoing loans and to help them avoid defaults.
Who is eligible for Restructuring 2.0?
To be eligible for restructuring 2.0, you have to meet the following conditions:
- Applicable only for borrowers whose accounts are classified as “standard” as of 31st March 2021.
- Restructuring is only available for borrowers who are impacted by the second wave of the pandemic. Like the first restructuring, borrowers have to provide supporting documentation like proof of loss of income, pay loss, job loss, etc.
- Eligible borrowers can apply for the restructuring before 30th September 2021. Once a borrower applies for restructuring 2.0, the lender must approve the plan and implement it within 90 days.
The RBI circular had given banks time until 2nd June to develop a bank board-approved plan for restructuring 2.0. After that, banks have to upload their final policy on their website so that borrowers can review it before applying for the restructuring.
Restructuring 2.0 Terms and Conditions
As per the new restructuring framework, lenders can offer any of these relief measures to eligible borrowers:
- Rescheduling of payments
- A moratorium for a maximum period of up to two years
- Conversion of the interest accrued to another credit facility
Banks can make their final decision as to the terms and conditions of the restructuring based on the income levels of the borrower.
However, note that loan settlements do NOT come under the restructuring scheme. If a borrower wants to settle a loan, then the lender has to declare the loan as an NPA (Non-Performing Asset) and process it as usual. Generally, in loan settlements, lenders allow borrowers who have defaulted frequently to close the loan by paying a smaller amount than the current outstanding loan amount. The lender can waive off late penalties, a portion of the interest and other charges and ask the borrower to repay the agreed upon settled amount in one or two instalments.
Restructuring 2.0 comes with a Cost Attached
Even if the lender agrees to your proposal for the restructuring, keep in mind that it comes with additional costs and long-term implications for the borrower.
- It increases overall Interest Burden
Opting for a tenure extension or the 2-year-moratorium increases the total interest outgo. Tenure change or moratorium offers only temporary relief. It doesn’t reduce the interest burden. Instead, it increases the overall interest obligation. Opting for restructuring can make it extra difficult for borrowers to repay the loan on time, especially if their income levels do not increase soon.
- Added Restructuring Charges
Also, be aware of the restructuring charges levied by lenders. For example, some lenders can increase the interest rate on the restructured loan, while others may charge an upfront fee for restructuring.
- It can negatively impact your Credit Score
Borrowers also have to bear in mind that restructuring a loan will impact their credit ratings in the long run. The restructuring is reported to credit bureaus and can cause your credit score to drop. Additionally, it is also noted on your credit report, thereby impacting future loan eligibility.
Also, note that restructuring even one loan when you have multiple loans will equally impact all loans. Suppose a borrower has three different loans from the same lender – a home loan, a personal loan and a credit card. If the borrower decides to restructure the personal loan, then the lender will automatically report all these loans as restructured. As you can see, restructuring has a long-term impact on your credit score and is also noted on your credit report. This makes it challenging to qualify for future loans and credit cards.
The Bottom Line – Should you opt for Restructuring 2.0?
Restructuring 2.0 may offer interim relief to financially stressed borrowers. However, borrowers have to bear in mind the costs and long-term impacts of the restructuring before opting for it.
Also, remember that it is not mandatory for lenders to accept the restructuring application of all eligible borrowers. The lender can reject your application, depending on your income levels, previous repayment history, etc.
So, if you’re going for it, consider all the costs, increase in interest outgo and make an informed decision, whether it’s the right choice for your situation.
The RBI has offered restructuring 2.0 to provide temporary relief to financially stressed borrowers due to the second wave of the pandemic. Make sure to consider the costs of restructuring, increase in interest before deciding whether to opt for it or not.