One Time Loan Restructuring - Meaning And Impact (1)

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One Time Loan Restructuring Meaning

• The Indian population is by now well acquainted
  with the setback that Banks and Financial
  institutions have faced due to the Pandemic where
  failure in repayments of loan continues to be an
  aggravating problem. To rescue the ailing sector
  from credit default risk issues the Reserve Bank
  of India has proposed a one time loan
  restructuring solution for personal and corporate
  loans. Borrowers of personal loans with regular
  payment history till March 2020 can now have
  their loan restructured via a framework
  formulated by the lending bank. Lenders are
  permitted to retain such loan classification as
  standard which will provide buffer to their
  non-performing assets. They will however be
  required to be classified as restructured for
  reporting to the credit bureaus. Banks will have
  to finalize an applicable framework by 31st Dec
  2020 for their one time loan restructuring
  service. Defaulted loans for more than 30 days
  preceding 1st March 2020 are ineligible under
  this program.

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• As per loan specialists, with this one time loan
  restructuring program, banks can now reschedule
  the loan repayments, convert the accrued interest
  to an alternate credit facility, extend the
  moratorium of existing loans for up to two years
  as well as extend the loan tenor. This one time
  loan restructuring will be done by banks after
  evaluating the repayment ability of the borrower.
  For the MSMEs too the RBI had earlier rolled out
  a program, applicable to only those with an
  outstanding debt of up to Rs 25 crore and the
  same is still under implementation. The new
  scheme is applicable to MSMEs with outstanding of
  more than 25 crores to be implemented before
  March 2021. Banks are additionally also
  instructed to keep aside provisions worth 5 of
  the amount. In the case of a corporate loan, the
  restructuring plan allows the conversion of a
  part of debt into equity or alternate
  non-convertible securities. Corporate loans
  restructuring plans will need to be implemented
  within 180 days of approval and an Inter Creditor
  Agreement needs to be duly signed by all lending
  institutions in case of multiple lenders within
  30 days of invocation, failing which banks have
  to make provision of 20 loans as compared to 10
  otherwise.

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How will one time loan restructuring impact a
borrower?

• Borrowers no longer have to worry about paying
  off their debts as per repayment schedule
  stipulated at the time of availing the loan.
  Their payment ability will be assessed by banks
  as per current fund flow and payment capacity.
  So, all borrowers who have taken the blow of a
  job loss or salary cut can hugely benefit from
  this one time loan restructuring program.
  Borrowers now can either repay the pending EMIs
  through a single transaction or can have them
  distributed across the existing EMIs. The accrued
  interest during the moratorium too can now be
  converted to a separate loan. Borrowers also have
  the option of not changing the EMI figure but
  rather extending the loan tenure.

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• One time loan restructuring plan however has its
  own demons within. Most concerning drawback is
  the negatively impacted credit scores and future
  loan eligibility, since the credit-score
  calculating algorithm remains unchanged. To add
  to the borrowers woes the lender would report
  all the various loans taken through them as
  restructured even though the borrower has opted
  for this facility to be applied on only one of
  the loans. The interest that a lender loses out
  during the restructuring period gets accumulated
  with the principal, elevating the overall
  interest payable. A dip in credit score seems to
  be unavoidable if opted for one-time loan
  restructuring plans. In short, the borrower
  eventually would end up paying more since this
  involves a fee payable to the lender along with a
  possible hike in the rate of interest. However
  the Supreme Court has recently provided some
  concession with relief for small category of
  borrowers directing the banks to refund the
  interest portion to the eligible borrowers

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• At present, the program of one time loan
  restructuring seems more favorable towards
  lending banks and FIs since they are maintaining
  these loans as standard loans in their books
  and preventing the accumulation of NPAs. Whereas
  borrowers will need to pay a fee for one time
  loan, handle the financial burden, and yet
  witness their credit scores dipping.
• Original Source One Time Loan Restructuring

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