Availing a Home Loan or any other form of credit offers appreciable convenience when trying to raise your cash flow to address any financial need. However, the repayments may turn into a challenge if one doesn’t plan their finances realistically. In certain instances, despite careful planning, you may face sudden crises or exigencies wherein you may be incapable of making the repayments on time. This is when a loan restructuring plan can come to your rescue.
What is Loan Restructuring?
Lenders extend loan restructuring schemes according to the guidelines issued by the Reserve Bank of India, which provide considerable relief to borrowers who may be struggling to repay their debts. These schemes let them repay dues, aligned to their altered monetary capacity and the new repayment terms, as per the agreement they have with their bank or lending institution. Loan restructuring may include the following measures:
- Rescheduling the EMIs
- Lowering interest rates
- Conversion of interest into another loan
- Granting a moratorium for a maximum of two years
The RBI’s Loan Restructuring Policy
The current loan restructuring scheme was implemented upon completion of the previous loan restructuring moratorium period. Unlike the latter, which was open to all borrowers, the present plan applies only to those borrowers whose income has been impacted, which has affected their repayment capacity. The RBI resolution plan is specifically aimed at retail loans and the highlights include:
- Interest that is charged or accrued may be converted into other credit facilities
- You can reschedule the loan repayment tenor
- Restructuring specifics cover liquidity, leverage and debt servicing
- Based on income levels, a moratorium limit of two years may be allowed
The RBI permits lenders to determine the moratorium amount; and whether it applies to the interest or principal component. Lenders can modify the repayment schedule of the principal and raise the interest.
Eligibility for Loan Restructuring
Borrowers may restructure their loans based on RBI guidelines, subject to fulfilling specific eligibility criteria such as:
- Individuals who have suffered financial setbacks and cannot repay their loans are eligible for the existing Loan Resolution Framework
- Those who have already availed credit restructuring under the previous resolution framework of August 2020 cannot qualify for the present scheme
- If you have received relief under the 2020 plan with a moratorium lower than two years, you may apply for further relief under the new scheme and seek an extension of another two years
- Standard loan accounts may be restructured if they have been marked ‘Standard’ as of March 2021
- Retail loans of all kinds, including Home Loans, personal loans and car loans are eligible for restructuring
- The lending institutions that qualify for loan restructuring include commercial banks, all-India financial institutions, non-banking financial companies (NBFCs), small finance banks, local area and regional rural banks, primary co-operative banks, state and district central co-operative banks
Significance of Your CIBIL Score
Credit ratings measure a borrower’s ability to repay a loan on the basis of their past repayment track record and income. Credit bureaus generate credit scores or CIBIL scores in the form of a three-digit number between 300 to 900, wherein 300 is the lowest score while 900 is the highest. These scores hold the key to availing ideal credit plans. For example, if you wish to secure housing finance, the required CIBIL score for a Home Loan is usually in the range of 750 and above.
A high credit score suggests timely repayment of debts and experience in handling credit. Such individuals are less likely to default, which gives lenders more confidence in offering them loans at lower interest rates. It also becomes much easier to secure pre-approved plans or other forms of credit with better rewards and benefits and a higher credit limit.
How Loan Restructuring Affects Eligibility and CIBIL Score
Loan restructuring provides leeway to those genuinely struggling to repay their debts. But this feature may come at a price and have long-term consequences on your financial goals. For instance, loans taken up for restructuring could reflect in credit reports as ‘restructured’ which may lower your CIBIL score. This will naturally impact your credit eligibility adversely, making it harder to avail of any loan or credit in the future.
Things to Keep in Mind Regarding Loan Restructuring
When seeking a loan restructuring option from your lender, here are a few basics you should bear in mind. These are:
Consider All Alternatives
First and foremost, assess your financial situation. If you indeed run out of all possible options and your cash reserve is severely impaired, you may avail of loan restructuring. But those who can manage the repayments with wiser fund management must continue to do so because it will help their credit-seeking ability in the long run.
Calculate the Costs
Loan restructuring adds to your credit costs. If your lender hikes the interest rates, the overall price of your loan will rise proportionately. In case of a moratorium, the unpaid interest will accumulate pushing up the principal amount.
Understand the Process
Your loan does not get restructured if you don’t pay your EMIs. You will have to apply for the facility and seek information from your lender on the best way to go about it.
Monitor Your CIBIL Score
Keep track of your credit score from time to time and explore ways to boost the rating in the coming months. Though restructuring can affect your CIBIL score, your rating may pick up once you start repaying your EMIs on time after the moratorium. You can easily check your CIBIL score online for free once a year. But if you wish to check your credit score multiple times in a year, you will need to pay a nominal fee.
Ways to Increase Eligibility for Future Loans After Loan Restructuring
Once you know your current credit rating after the loan restructuring, you can take corrective steps to enhance it so that you may boost your credit eligibility. The most effective way to do this is through initiating timely and full payments on your credit cards and loan EMIs. Never miss or default on payments. Longer credit lines will also reflect positively on your score as it shows your ability to pay dues for extended periods. Moreover, multiple hard enquiries will bring down your credit score, so avoid applying with different lenders.
Documents Required to Apply for Loan Restructuring
As a borrower, you need to submit certain documents to your lender for restructuring your loan as mentioned below:
- Proof of income – Income statements, salary slips
- KYC documents – Aadhaar Card, driving license
- Bank account statements
- GST returns for self-employed or business persons, MSME registration certificates, IT returns
Please note that the submission of a PAN Card or Form 60 is mandatory. Do also note that this list of documents is indicative, and you may be asked to submit additional documents at the time of the process.
Your credit score may take a hit when you restructure your loan. Nonetheless, it is a better alternative to not being able to pay the EMIs, which will hurt your CIBIL score and credit profile even more. Restructuring works best if one is left with no other avenue to repay existing debts. And even when you opt for it, repay the EMIs in a disciplined manner based on the new repayment terms and schedule to improve your eligibility for any future credit.
*Terms and conditions apply.
