How to restructure your loan during COVID-19 pandemic? Who can avail loan restructuring facility?

Loan restructuring is a facility provided to people who have been under temporary financial stress, to ensure that they can alter their repayment schedule without adversely affecting their credit score.

All you need to know about loan restructuring during COVID-19 pandemic

The COVID-19 pandemic affected the livelihoods of people across the globe. Millions lost their jobs and are struggling to meet daily expenses. Due to loss of income, many are struggling to pay their loan EMIs. This can not only affect their credit score but also cause them them lose their assets. 

It is in this scenario that the RBI decided to implement loan restructuring to help borrowers of various types of loans. On 6 August 2020, RBI released the loan restructuring guidelines for commercial banks, non-financial institutions, cooperative societies, and other financial institutions and asked them to offer loan restructuring facilities to the borrowers. 

What is the loan restructuring scheme?

The RBI’s loan restricting framework is applicable to all banks and lending institutions in India for resolving the issue of financial stress among borrowers in this pandemic-induced crisis. Under this framework, the loan repayment structure can be altered for borrowers who are affected financially (for instance, if a person has lost their source of income). This welcome move by RBI will provide relief to individuals and entities who are struggling to repay their debts as per the original loan repayment schedule. 

How does RBI's loan restructuring work?

The RBI has provided an overall guideline for the restructuring of loans. However, individual lending institutions have to come out with their own guidelines. Loan restructuring can be done by extending the repayment schedule or the loan tenure. The interest rate can be reduced as well. 

If the loan tenure is increased, the principal amount will get divided by more months, which will lower the monthly outgo. In times like this, when incomes are at an all-time low, reduced EMIs can be a great help. Another approach could be to transfer all the accrued interest amount on the loan to a new loan account. This will reduce the financial burden on the borrower for some time. 

If you are thinking of restructuring your loan, you have to find out which approach your bank/lending institution has opted for. Without knowing the approach, you should never accept or reject the restructuring offer. Use a loan calculator to check the new EMI that you will have to pay after the loan restructuring.

Related: What to know while availing of retail loans in the time of the COVID-19 pandemic?

Who can avail of this facility?

Individuals and entities meeting the following criteria are eligible for loan restructuring:

  • You are classified as a standard individual or entity with the bank as of 1 April 2021
  • Your income has decreased or dried up due to the COVID-19 pandemic
  • You availed of the loan before 1 April 2021

The bank will verify if the borrower is genuinely facing financial woes. If yes, it ascertains by what percentage the income has reduced, how it is affecting their (and their family’s) lifestyle, and whether the individual can pay the restructured EMI or not. 

Besides these, the bank will also evaluate the credit history of the borrower, and their track record of repayment of other loans. Finally, the bank will look into the responses of the borrower when they availed of the moratorium in 2020. 

This is the basic framework for eligibility as per the RBI. However, your bank might have more rigid criteria that you need to follow. So, be sure to understand the eligibility criteria put forward by your bank when going in for loan restructuring. 

Related: How to regain control of your expenses during a pandemic?

Which loans come under this framework?

As per RBI guidelines, the financial products that come under this framework of restructuring includes :

  • Loans on two-wheeler and cars
  • Credit card receivables
  • Personal loans
  • Educational loans
  • Personal loans to professionals
  • Home loans and other loans for creating or enhancing immovable assets
  • Loans provided to MSMEs via Udyam certificate

Which documents do you need to submit for loan restructuring?

If you are a salaried employee, you need to submit the following: 

  • Salary slips for March 2021 and for the last two months prior to the date of application
  • In case of job loss, a letter of discharge 
  • Declaration of expected earnings after the period of restructuring
  • Bank statement of salary account from October 2020 to date 

If you are self-employed, you have to submit the following:

  • Bank statement of CC or current account from 1 April 2020 to date
  • GST returns from October 2020 to date
  • IT returns for financial years 2019, 2020, and 2021 (filled) 
  • Last two years’ balance sheet and P&L account
  • Udyam certificate in case of MSMEs
  • Self-declaration of the business or profession affected by the pandemic 

If you have decided to restructure your loan, you can apply for the restructuring process with your lending institution. Make sure you submit all the documents mentioned above. Once the lending institution verifies all the documents and data, they will discuss the restructuring approach with you. If you agree to their terms and conditions, your loan repayment will be restructured. 

Related: 8 Financial lessons the COVID-19 pandemic taught us

How can borrowers benefit from loan restructuring?

First of all, the EMI that one is paying will reduce after restructuring, which can be of great help in a situation where incomes have tanked. Secondly, the borrower’s credit score will not be affected as much as it would have been if their loan becomes a non-performing asset (NPA). Finally, borrowers can avail of credit facility in the future as well without much difficulty because they would have only restructured the loan, not defaulted.

Last words

Life has become uncertain for many of us after the pandemic hit. Even top-level executives and well-established business owners are not assured of their incomes anymore. In such a scenario, loan restructuring can be a boon for borrowers. In 2020, borrowers were given the option of a moratorium for their loans, but everybody’s income was not affected in the same way. So, the RBI has framed this restructuring policy to specifically help those borrowers whose income was reduced or lost due to the crisis. 

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