What Is Loan Restructuring?
Although loans typically have a certain payback period, owing to events like the current pandemic, borrowers may find it challenging to repay their loan together with the interest rate. Instead of permitting borrowers to fall behind on their payments in such cases, financial institutions can implement measures that make repayments simpler with the assistance of the government.
Restructuring a loan or debt simply means changing the conditions of an existing loan to make it easier for the borrower to manage the repayment of the loan’s principle and interest obligations. Contrast this with debt refinancing, which will be detailed later. Generally speaking, offering the option of loan restructuring is recommended since it also prevents the debt from being classed as an NPA, or non-performing asset, which lowers the banks’ earnings. It is also less expensive than enabling the defaulter to file for bankruptcy.
Eligibility for Loan Restructuring
- Commercial Banks
- Small Finance Banks
- Local Area Banks and Regional Rural Banks
- Primary (Urban) Co-operative Banks
- State Co-operative Banks
- District Central Co-operative Banks
- Non-Banking Financial Companies
- All-India Financial Institutions
Things to Consider When Restructuring a Loan
- No loan may be subject to an automatic restructuring.
- Mail-in requests for loan restructuring might not be taken into account.
- Only after a successful verification will the team get in touch with you to go through the specifics of the debt restructuring.
Loan Restructuring Rules and Regulations of the RBI
The Reserve Bank of India (RBI) introduced debt restructuring laws and restrictions in response to the COVID-19 epidemic, which created an economic upheaval globally. This was done in order to assist lenders in restructuring any borrower loans that may become unrepayable as a result of the epidemic.
In accordance with the terms of their bank agreements, this restructure will give them flexibility by either
- Scheduling payments
- Interest rates falling
- Restricted loan repayment holiday, also known as a break in loan payments.
The good news is that restructuring is an option for practically all consumer debts, including personal loans, top-up loans, mortgages, student loans, auto loans, and other types of loans. However, the lender’s decision in this matter is final.
A loan restructuring’s qualifying requirements may also change based on your capacity to repay, the amount of the loan, and other factors. If you want to file for a loan restructuring, you must speak with your lender because various lenders may have different qualifying requirements.
Guidelines and Procedure for Loan Restructuring
There are several ways to restructure loans, including:
- Alteration to the payback period, which is often longer
- Variation in the Repayable Amount
- Modifications to the previously agreed-upon amount of installments
- A modification in the interest rate that was previously charged
- Provision for future loans
In some circumstances, the amount owed for settlement payments may be longer than three months.
Credit Score Effects of Loan Restructuring
Although loan restructuring may give consumers much-needed respite, it is not good news for everyone because it will have an impact on people’s credit ratings and eligibility. This is due to the fact that, despite the fact that lenders are permitted to keep such loans as “standard” (which will reduce their Non-Performing Assets or NPAs), restructured loans have a negative effect on the borrowers’ credit ratings.
The lender will record all of the borrower’s loans as restructured, even if the borrower only requested one loan to be so. Restructured loans are often listed under the “settled” or “written off” column, and lenders may see them as cases of intentional default.
It is challenging to determine how significantly a borrower’s credit score is impacted because this is a special circumstance. Previously, banks could only restructure loans when they become non-performing assets (NPAs). The good news is that even while consumers who want to restructure their debts may not be able to stop their credit scores from being impacted, they may attempt to raise them.
Documents Required to Apply for Loan Restructuring
Income proof documents:
- Salary slips before and after 1 Mar, 2020
- Income statements (self-employed/business entities)
KYC Documents
- Aadhaar card
- PAN card
- Driving licence
Bank Statements
- Last 3 months (salaried)
- Last 6 months and statements from December 2019 till February 2020 (self-employed/business entities)
For Self-Employed Applicants And Business Entities
- GST returns
- MSME registration certificate
- Income tax returns
Things to Consider When Restructuring a Loan
- No loan may be subject to an automatic restructuring.
- Mail-in requests for loan restructuring might not be taken into account.
- Only after a successful verification will the team get in touch with you to go through the specifics of the debt restructuring.
Conclusion:
The availability of loan restructuring varies by circumstance and is not always a choice. However, the pandemic’s economic effects allowed for a one-time restructuring, which the RBI had enabled. Before choosing this choice, borrowers should thoroughly evaluate their financial condition and future needs.
While there are many advantages to loan restructuring, it is nevertheless advisable for borrowers to be aware of the procedure and to consult with their lender about the best course of action for their particular circumstance.