Loan Restructuring - Meaning and Guidelines
Have you asked yourself the questions - what is loan restructuring or restructured loan meaning?
In this article, we will delve into what restructuring of loans is, and the difference between loan restructuring and refinancing.
What is Loan Restructuring
Although loans generally come with a specific repayment term, due to circumstances such as the ongoing pandemic, borrowers may find it difficult to repay their loan along with the interest rate.
In such circumstances, rather than letting borrowers default on their payments, financial institutions with the help of the government can make changes that allow for easier repayments.
Loan or debt restructuring simply refers to making changes in the existing loan terms to help the borrower manage the repayment of loan principal and interest due. This is not to be confused with loan refinancing which will be explained later.
Generally, providing the option for loan restructuring is preferred as it also prevents the loan from being classified as an NPA or non-performing asset which reduces the banks’ profits. Additionally, it is also less expensive than allowing the defaulter to declare bankruptcy.
Loan Restructuring Guidelines and Process
Loan restructuring is possible through multiple ways such as:
Change in the repayment period which is usually extended
Change in the repayable amount
Changes in the number of installments that were previously agreed upon
A change in the rate of interest previously charged
Provision for additional loans
In certain cases, the time due for settlement payments can exceed a period of three months.
RBI’s Loan Restructuring Rules and Regulations
In light of the COVID-19 pandemic that caused an upheaval in the economy worldwide, the Reserve Bank of India (RBI) announced loan restructuring rules and regulations
This was to help lenders restructure the loans of all borrowers who may be unable to repay due to the pandemic.
This restructuring will allow them flexibility based on the agreement with their banks through either
lowering of interest rates
limited loan repayment holiday i.e., a pause on the loan repayment.
The good news is that restructuring is available for almost all retail loans such as personal loans, top-up loans, home loans, education loans, car loans, etc. However, this completely depends on the discretion of the lender.
Additionally, the eligibility criteria to avail loan restructuring will vary depending on your repayment ability, loan amount availed, etc. Different lenders can impose different eligibility criteria hence if you wish to apply for restructuring of your loan, you will have to contact your lender.
If you wish to know more about the latest RBI circular on restructuring of loans, click here.
Disclaimer: RBI’s loan restructuring guidelines were mainly applicable during the COVID pandemic in 2020. However, as of now if you require your loan to be restructured, you will have to contact your lender as these provisions may not be applicable currently.
Impact of Loan Restructuring on Credit Score
While loan restructuring may provide much-needed relief for borrowers, it is not happy news all around as one’s credit scores and eligibility will get affected.
This is because while lenders are allowed to retain such loans as ‘standard’(which will lower their Non-Performing Assets or NPAs), restructured loans have a negative impact on the borrowers’ credit scores.
Even if the borrower has applied for only one loan to be restructured, the lender will report all loans of the borrower’s as restructured. Restructured loans are generally reported under the ‘settled’ or ‘written off’ section and these are sometimes looked at by lenders as wilful defaulting.
However, since this is a unique situation, it is difficult to estimate just how severely a borrower’s credit score gets affected. Previously, banks were allowed to restructure loans only once they turned into NPAs.
However, although borrowers who wish to restructure their loans may not be able to prevent their credit scores from being affected, they can work towards improving the same.
Loan Restructuring vs. Loan Refinancing
A lot of times the terms loan restructuring and loan refinancing tend to be used interchangeably which is not right as they both have different meanings.
While loan restructuring is making changes in the existing loan terms to help borrowers and lenders, loan refinancing simply refers to availing a separate loan to pay off an existing loan.
Loan refinancing is usually opted for if the new loan comes with better terms and interest rates. This also helps borrowers increase their liquidity to help them monetarily
If the borrower has refinanced their existing loan with a new lower interest loan, the monthly EMI payments may be lesser. However, it can come with its own set of problems as well.
Loan refinancing can be expensive and unless managed well, debt payments may spiral out of control. Therefore calculating all the expenses, interest payments, and factoring in difficult financial situations such as a job loss is important before opting for this.
But, loan restructuring and loan refinancing can benefit both lenders as well as borrowers based on the terms agreed upon. Therefore selecting an option that best suits the borrower’s requirements and financial situation is necessary.
Loan restructuring is an option that is not always available and varies on a case-to-case basis. However, due to the economic impact of the pandemic, the RBI had made a one-time restructure possible. Borrowers must carefully assess their financial situation and future requirements prior to selecting this option.
While loan restructuring comes with a lot of benefits, understanding the process and discussing with their lender regarding the steps most suited for their situation is highly recommended.
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