RBI Credit Moratorium: How Borrowers Can Use the Second Credit Moratorium Offered Due to Coronavirus: Should You Go For It?

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The novel coronavirus pandemic has hit the common man’s finances hard. In the past year or more, many have lost their jobs or suffered a complete or substantial loss of income, making it difficult for many to service liabilities such as loans. To help those borrowers struggling to repay loans, the Reserve Bank of India (RBI) had helped with loan restructuring.

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

Here’s What You Need To Know About The Second Credit Restructuring Program For Individual Borrowers; Find out who can choose how the process works and whether you should take advantage of it.

Who is entitled to a second restructuring?

This restructuring is primarily aimed at relieving borrowers who have not opted for restructuring in the past and who regularly make repayments.

“Retail loans drawn by individual borrowers who have not undergone restructuring under any of the previous restructuring frameworks (including the 1.0 resolution framework as announced by RBI in its guidelines dated August 6, 2020) and whose accounts are listed as’ Standard ‘were classified as March 2021 to be considered for a restructuring under the Resolution Framework 2.0, as the RBI announced on May 5, 2021, “says Anil Pinapala, founder and CEO of Vivifi India Finance, a non-bank finance company.

If a borrower does not repay the loan on time, it will be treated as a defaulting account and will be classified as inferior after a certain period of time. It is important for you to know after how many repayment periods or days the credit account loses the standard indicator. “Usually a loan account is declared defaulted if the repayment is not made for 90 days or more,” says Gaurav Chopra founder and CEO of IndiaLends, an online lending platform. This means that if you make the monthly repayment for 3 months continuously, the credit account will be classified as inferior.

Which loans are eligible

On the product side, all common credit products can be restructured. “All personal loans such as home loans, top-up loans, personal loans, auto loans, education loans, and gold loans can be restructured under the program,” says Chopra.

HDFC Bank has listed suitable credit facilities in the Retail Loans category on its website as credit card receivables, auto and two-wheeler loans, personal loans (both for personal use and business / commercial purposes), professional personal loans, education loans, and loans to create / improve real estate Assets (e.g. home loans).

However, credit facilities that credit institutions make available to their own employees cannot be resolved under this framework.

What options do you have in the context of a restructuring?

“In the case of fixed-term loans, a moratorium on the payment of interest and / or amortization with or without an extension of the remaining term within the framework of the maximum amount set in the program is offered,” says Babu KA, Senior VP & Head, Loan Collection & Recovery Department, Bundesbank.

This means that you can request a full vacation from any repayment, be it principal or interest, up to a total moratorium of two years. You can also choose to only pay the interest part during the moratorium period. After the moratorium, you can keep the original term of the accelerated repayment loan with higher EMIs, otherwise you can request an extension of the term to make repayment more affordable after the moratorium.

Alternatively, you can opt for a term extension without any moratorium, and this is the goal of many borrowers. “Tenure extension / moratorium on fixed-term loans is chosen by many eligible borrowers,” says Babu.

Impact of EMI Vacation on an outstanding car loan of Rs 5 lakh
Current term of office remaining 5 years 5 years 5 years 5 years
Existing EMI Rs 10,624 Rs 10,624 Rs 10,624 Rs 10,624
Vacation time because EMI is not paid at all 1 year 1 year two years two years
Accrued interest after moratorium Rs 52,357 Rs 52,357 Rs 1,10,195 Rs 1,10,195
Outstanding headmaster after moratorium Rs 5.53 lakh Rs 5.53 lakh Rs 6.10 lakh Rs 6.10 lakh
Original term of office extended No 1 year No two years
Remaining term of office after moratorium 4 years 5 years 3 years 5 years
Revised EMI Rs 14,009 11,736 rupees 19,689 rupees 12,965 rupees
Total additional interest payment Rs 35,030 Rs 66,745 Rs 71,403 € 1,40,480
Interest rate 10% pa on the monthly credit

Impact of principal repayment leave on an outstanding home loan of Rs 30 lakh
Current term of office remaining ten years ten years ten years ten years
Existing EMI Rs 36398 Rs 36398 Rs 36398 Rs 36398
Vacation time only for interest payment 1 year 1 year two years two years
Monthly interest payment during the vacation 20,000 rupees 20,000 rupees 20,000 rupees 20,000 rupees
Original term of office extended No 1 year No two years
Remaining term of office after moratorium 9 years ten years 8 years ten years
Revised EMI Rs 39,056 No change 42,410 rupees No change
Total additional interest payment 90,270 rupees Rs 2.4 lakh Rs 1.84 lakh Rs 4.8 lakh
Interest rate 8% pa on the monthly balance

Every extension or moratorium means higher interest expenses

Keep in mind that whether you opt for a tenure extension or a moratorium on EMI or principal repayment, it will result in higher interest expense overall. This is because a lower or no repayment of the capital during the moratorium or the extended term leads to a higher residual debt for a longer period of time. Therefore, the interest charged on this higher outstanding amount will be higher.

You can only minimize the additional interest payment by at least serving the interest during the short moratorium and restructuring the loan so that it is repaid within the original term. For example, in the example above, if you want a 1 year principal repayment moratorium by paying only monthly interest and receiving a one year tenure extension, your additional total interest payment will be Rs 2.4 lakh. However, if you do not extend the tenure and pay higher EMI after the moratorium, your additional interest outflow will be Rs 90,270.

Will only commercial banks offer restructuring?

Are credit union and non-banking finance company (NBFC) loans restructurable? “RBI has authorized all lenders, including commercial banks in India, public sector banks, private banks, foreign banks, state credit unions, municipal credit unions, regional rural banks, district credit unions, housing finance companies and NBFCs to use this opportunity with indulgence,” says Chopra.

How long does it take to process your application

However, while you may be eligible to apply for dissolution, it is at the lender’s discretion to accept your application. Similar to processing your new loan application, lenders may seek additional information while processing your restructuring application to determine how urgent your need is and what they can best offer in your case.

What if the borrower has already used the first restructuring?

Borrowers who used the restructuring facility in 2020 can also receive relief as part of a second restructuring if there is scope to do so. “The total upper limit for moratorium and / or extension of the remaining term, which were granted within the framework of the resolution framework 1.0 and this framework together, is two years,” says the RBI announcement.

If the total moratorium used by the borrower was less than two years and that borrower up to the 31st, including the last, is up to 2 years. So if the last time a borrower received a moratorium of 6 months, he / she may be entitled to an additional moratorium of up to 1 year 6 months.

Will it affect your credit score?

One of the most critical factors that can affect borrowers seeking credit restructuring under the new workout plan is their credit history and creditworthiness. While these borrowers will not be placed in the general default category, their credit history will reflect the restructuring of the loans.

“The reporting to credit bureaus will continue and will be tagged with the tag” Account restructured under COVID 19 “. The impact on creditworthiness will be such that the post-restructuring revised rating will be less than that of a standard no arrears account but more than a standard long arrears account or NPA. Therefore, between restructuring and being NPA (ie, loan repayment failure), the better option is restructuring in two ways – easing the deadlines for repayment obligations and creditworthiness, “says Babu.

Borrowing Challenges in the Future

However, while most borrowers who choose to restructure will be the victims of an adverse economic situation that was beyond their control, this will have an impact on easier access to credit in the future.

“The impact of COVID-19 is a universal situation and the vast majority of individuals and businesses are affected and resorting to debt restructuring. In the future, when considering a new exposure, credit institutions may not attach great importance to the effects of COVID-19. “And a further reduction in creditworthiness, but would assess the then existing business scenarios with future cash flow and profitability,” says Babu.

Should you restructure?

Restructuring has its costs in the form of higher interest payments and partial impairment of the credit history.

You should therefore accept the call for restructuring after a thorough analysis and only when you are sure of your future income and can adhere to the revised repayment plan. After all, a default has a serious impact on costs and future access to credit.

“Loan restructuring should be seen as a last resort in managing your loan account. If you can pay your EMIs on the current schedule by managing your budget or through new revenue streams, etc., it is highly recommended. So,” says Chopra.

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