How borrowers can use the second loan moratorium proposed due to coronavirus: should you choose it?

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The new coronavirus pandemic has hit the finances of the common man hard. Over the past more than one year, many have lost their jobs or witnessed a complete or significant loss of income, making it difficult for many to service obligations such as loans. To help those borrowers who found it difficult to repay loans, Reserve Bank of India (RBI) extended a helping hand in the form of loan restructuring.

In 2020, RBI announced a loan restructuring program. And then, in May 2021, due to the second wave of Covid-19, he announced a second resolution scheme for individual borrowers.

Here’s what you need to know about second loan restructuring program; find out who might choose it, how the process works, and if you should take advantage of it.

Who is eligible for second restructuring?

This restructuring is primarily aimed at helping those borrowers who did not choose to restructure their loans in the past and are making regular payments.

“Retail loans from individual borrowers that have not benefited from restructuring under any of the earlier restructuring schemes (including under RBI’s Resolution System 1.0 announced in accordance with its guidelines dated August 6, 2020), and whose accounts have been classified as ‘Standard’ as on March 31, 2021, may be considered for restructuring under Resolution Framework 2.0 as announced by RBI on May 5, 2021, ”says Anil Pinapala, founder and CEO of Vivifi India Finance, a non-bank financial institution companies.

If the borrower does not repay the loan on time, then it is considered a default account and after a certain period is classified as non-standard. It is important for you to know that after how many days or days it expires, the loan account will lose the standard tag. “Typically, a credit account is declared default if no repayment is made for 90 days or more,” says Gaurav Chopra, founder and CEO of IndiaLends, an online lending platform. This means that if you still make monthly payments for 3 months continuously, the loan account will be categorized as non-standard.

What loans are suitable

In terms of products, all popular loan products are subject to restructuring. “All retail loans such as home loans, top-up mortgages, personal loans, car loans, education loans and gold loans can be restructured according to the scheme,” Chopra says.

HDFC Bank has listed eligible lines of credit on its website under the retail loans category such as credit card receivables, car loans and two-wheel loans, personal loans (both for personal use and business / commercial purposes), personal loans for professionals Loans for education and loans made for the creation / expansion of real estate (for example, home loans).

However, lines of credit provided by credit institutions to their employees are not subject to settlement in accordance with this structure.

What restructuring options do you have?

“A moratorium on interest and / or principal payments, with or without an extension of the remaining maturity, subject to the maximum stipulated in the scheme, is proposed in the case of urgent loans,” says Babu K.A., Senior Vice President and Head of Collection and Returns loans. Office, Federal Bank.

This means that you can apply for full leave of any payment, whether it be principal or interest, up to a general moratorium of two years. You can also choose to pay only a percentage portion during the moratorium period. After the moratorium, you can stick to the original term of the accelerated loan with higher EMIs, otherwise you can apply for an extension of the tenure to make repayment more affordable after the moratorium.

Alternatively, you can opt to extend the tenure without any moratorium, which is what many borrowers are striving for. “The tenure extension / term loan moratorium is the choice of many eligible borrowers,” Babu says.

Impact of weekend EMI on an outstanding car loan of 5 lakhs
Current remaining tenure 5 years 5 years 5 years 5 years
Existing EMI 10,624 rupees 10,624 rupees 10,624 rupees 10,624 rupees
Holiday period for non-payment of EMI 1 year 1 year 2 years 2 years
Interest accrued after the moratorium Rs 52,357 Rs 52,357 Rs 1.10,195 Rs 1.10,195
Outstanding principal after the moratorium 5.53 rupees 5.53 rupees 6.10 rupees 6.10 rupees
Initial term of office extended Not 1 year Not 2 years
Remaining tenure after the moratorium 4 years 5 years 3 years 5 years
Revised EMI 14,009 rupees 11,736 rupees Rs 19,689 12,965 rupees
Total additional interest payment Rs 35,030 Rs 66,745 Rs 71,403 1 40 480 rupees
Interest rate 10% per annum on monthly balance

Effect of Weekends on Repayment of Principal Debt on Outstanding Housing Loan of 30 Lakhs
Current remaining tenure 10 years 10 years 10 years 10 years
Existing EMI Rs 36398 Rs 36398 Rs 36398 Rs 36398
Holiday period for interest payments only 1 year 1 year 2 years 2 years
Monthly interest payments during the holidays 20,000 rupees 20,000 rupees 20,000 rupees 20,000 rupees
Initial term of office extended Not 1 year Not 2 years
Remaining tenure after the moratorium 9 years 10 years 8 years 10 years
Revised EMI Rs 39,056 Without changes Rs 42,410 Without changes
Total additional interest payment Rs 90,270 2.4 rupees Rs 1.84 per lakh 4.8 lakhs
Interest rate of 8% per annum on the monthly balance

Any extension or moratorium means higher interest payments.

Keep in mind that whether you opt for an extension of tenure or a moratorium on EMI or payment of principal, this will result in an overall higher interest income. This is because less or no principal repayment during a moratorium or extended period will increase the outstanding debt over a longer period. Consequently, the interest charged on this higher outstanding debt will be higher.

The only way to minimize additional interest payments is to service at least interest during a short moratorium and restructure the loan so that it is repaid during the original tenure. For example, in the example above, if you impose a 1 year principal moratorium, paying only monthly interest, and get a one year extension of the tenure, your total additional interest payment is 2.4 lakh. However, unless you renew your tenure and start paying higher EMIs after the moratorium, your additional interest churn will be Rs 90,270.

Will only commercial banks offer restructuring?

Are loans taken from cooperative banks and non-bank financial companies (NBFC) eligible for restructuring? “RBI has authorized all lenders, including commercial banks in India, public sector banks, private banks, foreign banks, state cooperative banks, city cooperative banks, regional rural banks, district cooperative banks, housing finance companies and NBFCs, to use this facility with patience. “Chopra says.

How long will it take to process your application?

While you may be eligible to apply for a permit, it is nevertheless the lender’s discretion to accept your request. Similar to processing your new loan application, lenders may ask for more information when processing your restructuring request to find out how urgent your needs are and what they can best offer in your case.

What if the borrower has already taken advantage of the first restructuring?

Borrowers who took advantage of the restructuring opportunity in 2020 may also receive assistance for a second restructuring, if available. “The general restrictions on the moratorium and / or the extension of the residual period, provided in accordance with the Decision Making System – 1.0 and this structure together, should be two years,” – said in a notice RBI.

If the general moratorium granted by the borrower was less than two years, and such borrower made regular payments until March 31, 2021 in accordance with the new restructuring terms, then he / she may apply for an extension of the moratorium so that the total period of the moratorium including the last one – up to 2 years. Thus, if the borrower last received a 6 month moratorium, he / she may be eligible to receive an additional moratorium for up to 1 year 6 months.

Will this affect your credit rating?

One of the most important factors that can affect borrowers going to restructure their loans under the new resolution plan are their credit history and credit rating. Although these borrowers will not be categorized as general defaults, their credit history will reflect loan restructuring.

“Reporting to credit reporting agencies will continue with the addition of a COVID 19 restructured account tag. The impact on the credit rating will be such that the revised rating after the restructuring will be less than that of a standard account without arrears. but this is more than a standard long-overdue invoice or NPA. Therefore, between restructuring and naming NPA (that is, defaulting on loan repayments), the best option is restructuring for two reasons – easier maturities and credit rating, says Babu.

Problems with obtaining loans in the future

Although most borrowers choosing restructuring are victims of an unfavorable economic situation that was beyond their control, it will nonetheless affect easier access to credit in the future.

“The impact of COVID-19 is a universal situation, and the vast majority of individuals and entities are affected and are resorting to restructuring their debts. In the future, lending institutions may not attach much importance to the impact of COVID-19 when considering a new risk. and further downgrading of the credit rating, but will assess the current business scenarios against future cash flows and viability, ”says Babu.

Should you go for restructuring?

The restructuring is associated with higher interest payments and, to some extent, impairment of credit history.

So, you should make a restructuring decision after careful consideration and only when you are confident in your future earnings and can stick to the revised repayment schedule. Because in the event of a default, this would have serious consequences in terms of costs and future access to credit.

“Loan restructuring should be seen as a last resort for managing your loan account. If you can pay for your EMIs according to the current schedule, by managing your budget or through new sources of income, etc., then it is highly recommended that you do so. So, says Chopra.

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