Restructuring of Loans

The phenomenon of changing existing loan terms and conditions or loan contracts for the borrower is called restructuring of loans. This process is followed to facilitate the management of interest obligation due to the lender, the bank or NBFC, or the management of loan principal (initial size of the loan). It is usually referred to as ‘one-time’ restructuring because there is a timeline with defined terms and conditions for eligibility for restructuring of personal loans, MSMEs, and corporations. Restructuring is considered due to reasons which lead to severe supply chain disruption and demand, such as Covid-19. This is because, in these times, the borrower is at risk of default. 

What is RBI Loan Restructuring?

The Covid-19 pandemic had led to significant financial stress for the customers. To address this economic fallout and make certain resolution plans, a framework has been provided to the lending institutions or banks by The Reserve Bank of India (RBI). Based on the regulatory guidelines and the framework, the bank frames its policy for restructuring the loan/s of entities and individuals that have been impacted due to the Covid-19 pandemic.

Who can apply for Loan Restructuring?

The basic requirements to be eligible for restructuring of loans are as follows:

1. The matching of the applicant’s repayment history and credit report with the eligibility as per regulatory guidelines for one-time loan restructuring. 
2. The applicant’s loan amount must have no dues pending or overdue for less than 30 days (89 days for MSME customers). 
3. There should have been an impact on the applicant’s income for any specific reason like it could be Covid-19 for the current scenario. 

Loan Restructuring Documentation:

If your application to restructure the loan gets accepted, the next step would be the requirement of some important documentation as per RBI loan restructuring. These documents include-

1. Bank statements

Bank statements of at least three months are required for the applicants receiving salaries, and for self-employed people or business entities, it is six months. 

2. Income Proof

Salary slips for salaried people and income statements for business entities or self-employed are required. 

3. For Business Entities or Self-employed People

MSME registration certificate, GST returns, income tax returns, etc., (if applicable) are also required.

4. KYC Documents

If any of your details, like address, etc., have changed ever since you submitted your KYC documents, then this is required. 

These documents will have to be submitted at the applicant’s nearest branch for further restructuring of the loan. Note that-

1. In case there is more than one applicant for the same loan or co-applicants, the documentation of both will be required. 

2. If you have to restructure more than one loan, the documents for every loan will be required. 

3. Depending on the loan amount, documents related to additional collateral may also be required. This is in the case of secured loans. 

The request to restructure loans will only start processing once all the required documents have been submitted and verified as per the RBI loan restructuring scheme. 

What type of loans are not eligible for restructuring?

The following loans are not eligible for restructuring:

1. Exposures of housing finance companies where the account has been rescheduled after a specific date provided by them. 
2. Loans are provided to financial service providers, agricultural credit societies, and local, state, and central government bodies.
3. Loans to entities/individuals for agricultural purposes.
4. Under the MSME guidelines, loans for commercial usage will be entitled to claim.

Which are the Products Covered under the Regulatory Restructuring Relief Package?

• Loans are given for the enhancement or creation of immovable assets (for example, housing loans)
• Credit card receivables
• Education loans
• Auto-loans and two-wheeler loans
• Personal loans to professionals
• Auto-loans and two-wheeler loans
• MSME loans with Udyam certificate

Impact of Restructuring on CIBIL Score:

The restructuring of the loan scheme is developed to provide relief to those whose incomes have been impacted due to the Covid-19 pandemic. However, this process also has an impact on the CIBIL credit score. Whichever loans will be restructured by the applicant will be termed as ‘restructured’ in the credit reports. Hence, the decision to restructure a loan should be based on the types of restructuring the lender offers you, plus your financial condition. If you can’t repay your loans, then go for restructuring for sure. 

Conclusion

The restructuring of loans provides an opportunity to applicants to restore their financial stability and maintain continuity in servicing the debt. If you can’t settle your debts, then loan restructuring is a good idea. The idea of restructuring is to make your loans more affordable by changing their terms. There can be different types of loan restructuring, from lowering your interest rate or current balance to modifying your loan with a longer repayment term. Restructuring can be a very good option to provide you time for the repayment of your loans but make sure you consider all the loan restructuring options before moving forward with the step.