A home loan is a commitment for twenty to thirty years. We spend a significant part of our lives paying EMIs to live in the dream house, but life is unpredictable, and nobody can be sure about its plans. In situations like Corona, recession, etc., thousands of people lose their jobs. Businesses go bankrupt with adverse impacts on direct and indirect dependents.
In such situations, people who have taken a loan, are hard hit. Loan restructuring is one of the ways to rearrange the loan agreement. The term has become pretty popular in media, RBI declarations, and people discussions during ongoing ‘’Corona Kaal’’.
We will continue the passage with the meaning of loan restructuring, impact, RBI’s decisions during Covid times, and more.
What is Loan Restructuring?
Loan Restructuring is an arrangement to avoid default due to financial distress. The borrower can approach their loan distributor or financial institution for modification of the home loan terms and conditions.
Borrower and lender reach an agreement to revisit, negotiate, and revise the home loan rate and minimize the chances of loan default.
Loan Restructuring Methods
1) Borrower can request to extend the loan tenure with or without changes in the rate of interest. With this arrangement, the borrower gets more time to pay the same principal amount. This method brings down the pressure of paying EMIs because you have more time to pay the same amount. This approach of loan restructuring is very fruitful for people in acute financial distress.
2) Moratorium or lower the interest rate is another approach for loan restructuring. In this method, lenders offer a moratorium through conversion of all the accrued interest into a new home loan account. The borrower can request for a moratorium, but the final decision is at the discretion of the loan distributor or financial institutions.
There has been lots of policy changes around home loans, mortgage loans, and other financial instruments because of the Corona pandemic.
We are locked inside the home from March 2020, and it has become difficult to pay EMIs on time, especially for people who are involved in field jobs and MSME business owners. RBI introduced a one-time restructuring scheme to address financially affected sectors and people.
If you are also affected financially due to job loss and business closure, our next section will help you with recent steps taken by RBI and ways to come out from troubled waters.
What is a One-time Loan Restructuring Scheme?
Reserve Bank of India has specifically mentioned this scheme for people affected by the Covid-19 pandemic. Banks, financial organizations, and loan distributors can start a recuperative plan for economically distressed customers.
The RBI’s restructuring scheme includes provisions for extending the loan tenure through a moratorium not more than two years. The scheme also provides a facility of additional credit besides the ongoing loan.
Eligibility
The one-time restructuring scheme is available for individuals and entities on the brink of default due to the adverse impact of the pandemic. The people who are unable to pay EMIs with reasons related to Corona.
Eligibility is applicable if EMI is not overdue exceeding thirty days for individuals and eighty-nine days for MSMEs as of 1st March 2020. For MSME loans below twenty-five, crores can avail of the facility.
Other Features
- RBI also gave a directive to not mark these loan accounts as Non-Performing Assets and classify them as Standard accounts.
- Banks and financial institutions can restructure loan account without changing the owners of the distressed entity.
- The deadline for the scheme implementation was fixed by 31st December 2020. It was ninety days for individuals and 180 days for MSMEs.
Advantages of One- time Loan Restructuring Scheme
- Distribution of the principal payable loan amount for a longer tenure lowers the burden of EMIs
- Writing loan accounts as standard in place of NPA gives a positive boost to the P&L books of the banks and loan distributors.
- Give ample time to revive from the shock of the Corona led business closure and unemployment.
- Moratorium up to two years is great support from the central bank of India.
Corona pandemic is the greatest challenge globally because of its different variants and waves. After the first and second waves, the world is experiencing the Delta variant and the impending third wave. In India, over one crore people have lost their jobs in 2021 alone.
Therefore, RBI has introduced a new Loan Restructuring Scheme 2021 on 5th May 2021, a continuation of last year’s scheme, known as Resolution Framework-2.0.
Loan Restructuring Scheme 2021 (Resolution Framework-2.0)
People who could not avail benefits of the loan restructuring scheme 2020, can avail the advantages of the new scheme in 2021. Even if you have taken a moratorium last year, can extend the loan period for a further two years with resolution framework 2.0.
Features and advantages of new restructuring scheme, 2021
- The new scheme covers individuals, small businesses, and the MSME sector.
- Borrowers can avail new or second restructure plan. They can use residual moratorium tenure, extend from 2020 for a maximum period of two years.
Note: Banks and loan distributors decide the framework. Details can vary from lender to lender.
Things to consider for applying loan restructure scheme
- Loan restructuring through moratorium adds additional interest during the tenure. Accumulation of interest might increase your EMI.
- Your desired moratorium period needs to be approved by the lender.
Though RBI has done impressive work by allowing loan restructuring and boosting lender’s books, it is advisable to keep paying your EMIs on time. Taking a loan restructure scheme might prove expensive if you see the bigger picture. Consider this as the last resort when there is no other option.
