RBI’S Restructuring Plan for Personal Loans in 7 Points

The Reserve Bank of India has proposed a separate, one-time loan restructuring for Personal Loan accounts. After six months of Moratorium, borrowers stressed due to pandemic have been provided with a cushion to reset their loan EMIs and repay loans within 2 years.

The terms and conditions of the new loan will be defined by respective lenders by December 2020. The exact contours will be as per the guidelines set by the expert committee headed by KV Kamath. As the COVID-19 Moratorium expires on 30 Aug 2020, you will have four months of window to apply for Personal Loan Restructuring. Following which, the bank will have to invocate the loan within next 30 days.

But how would restricting of your loan impact your financial health? Would it be recommended to opt for loan restructuring after Moratorium of 6 months?

Let’s decode RBI’s proposal to restructure personal loans in 7 points below:

1. What all retail loans can opt for restructuring under Personal Loan category?

Personal Loans here include all term loans borrowed by individuals as Gold Loan, Education loan, Car Loan, loans for home improvement, including Home Loan, consumer durable loan and loans against securities. It will not include business loans or credit lines. That will be re-aligned only as per guidelines for MSMEs.

2. Can I apply for Personal Loan restructuring immediately after Moratorium expiry?

The proposed Personal Loan Restructuring is not a continuation of Moratorium. Your EMIs will be due as per accrued interest and outstanding principal. The resolution for loan restructuring will be specific to each lender as well as customer. Basis your credit profile the lender may or may not approve the request for restructuring of loan. Thus, it is recommended to be prepared for serving EMIs as long as the bank replies to your request.

3. How is loan restructuring different from Moratorium?

Loan restructuring will basically work like a balance transfer loan that you will avail of from your existing lender. It will not provide any sort of EMI holiday as in the case of Moratorium. You will service interest & principal each month along your instalments. While restructuring the loan, the EMI calculation may vary across the lenders. Some of the options may include: reducing EMIs/ step up EMIs, interest only instalments or equated instalments.

4. After Moratorium, should I restructure my loan or not?

The loan restructuring should be seen as handholding to repay the dues once and for all. You should not see it as a means to postpone your repayments. Opt for recast only if your current monthly income is hit by COVID19 and your cash flows do not allow repaying the present EMIs.

If you calculate the cost of Moratorium; the six EMI holiday has already been resulted in 9 to 10 EMIs and further delaying these instalments will only add the interest cost to your loan. So strictly opt for restructuring only as a last resort.

5. What is the maximum tenure for restructuring of loans?

As per central bank’s statement you will get two years to repay your dues under proposed restructuring plan. Thus, restructuring could be ideal for stressed small ticket loans.

6. Who can apply for restructuring of Personal Loans?

All Personal Loans, Car Loans, Education Loans, Home Loans, Gold Loans & Credit Card Loans can apply for loan restructuring after August 2020 till December 2020. However you should be able to prove the repayment difficulties due to pandemic. Also, the account should not be in default for more than 30 days till March 1, 2020 to be eligible for restructuring.

7. I want to opt for longer tenure of loan, what are the possibilities after Moratorium?

Herein it is important to wait for guidelines of expert committee. There are following options for a borrower after Moratorium.

1. Service the same loan and extend the tenure as per the new repayment schedule issued by the bank after the Loan Moratorium.
2. After August, service the same loan and reset EMIs and pay little more each month to close the loan in the same tenure. The loan tenure will increase by the duration of Moratorium only.
3. Apply for restructured loan for accumulated interest and principal amount for 2 years and continue servicing previous loan as is.
4. Apply for Balance Transfer Loan to another lender and re-set loan according to your financial situation. However your ability to prove repayment capacity will play crucial role in this option.