The RBI recently announced that it would allow a one-time restructuring of loans across all sectors. This move has been hailed as a much-needed lifeline for borrowers struggling to repay their EMIs due to the economic fallout of the Covid-19 pandemic.  

If you're wondering how to take advantage of this generous offer from the Central Bank, you've arrived in the right place. Here, in this article, we explain how loan restructuring impacts borrowers while answering all your queries on the topic. 

What is RBI loan restructuring? 

The RBI had initially announced an EMI moratorium from 1st March to 31st August. As the end of the moratorium period draws close, borrowers hoped that the RBI would extend the ongoing relief. 

Instead of extending the moratorium, the RBI has announced a one-time offer for restructuring loans in its latest statement. This move is intended to help borrowers better manage the financial stress caused by the Covid-19 pandemic. The one-time restructuring offer is applicable for all standard loans. It means, borrowers can now, restructure loan repayments by

  • Extending loan tenures 

  • Taking a limited repayment holiday 

  • Shifting the accrued interest due to the six-month moratorium to a separate, smaller loan

  • Renewing the terms of an ongoing loan by opting for step-up EMIs with a lower payout for a few months, then increasing the EMI as the finances of the borrower get steady

What makes the RBI’s announcement noteworthy is that – borrowers who go in for the restructure won’t be classified as a defaulter and the loan won’t be marked as an NPA (Non-Performing Asset) 

Before the RBI's announcement, banks would agree to change the loan terms for individual borrowers, who were struggling to pay their EMIs on time. However, in these cases, banks would declare the borrower as a defaulter. This, in turn, brought down the borrower's credit score and negatively impacted his creditworthiness for future loans.

With the RBI's new announcement, opting for a restructuring of an ongoing loan will not impact borrowers' credit scores. Additionally, it offers a helping hand to borrowers struggling to deal with the economic fallouts due to the Covid-19 pandemic.

Who is eligible for RBI restructuring? 

Individuals and corporates whose loan accounts are not in default for more than 30 days, as on 1st March 2020, are eligible for this scheme.  

Borrowers who have been paying their EMIs regularly until March, but currently struggling due to the pandemic are eligible for this offer. Borrowers who were already in default for more than 30 days, as on 1st March, cannot avail of this scheme.  

The move is mainly intended to help individual and corporate borrowers who have their revenues affected by the pandemic regain profitability and get back on their feet. 

What is the duration of restructuring?

For individual borrowers, the restructuring of personal loans, home loans, and other retail loans can be invoked until 31st December 2020. Banks must implement the scheme within 90 days of a borrower requesting for a restructure. However, note that this applies only for accounts that have been classified as standard. 

Banks can put forth a restructuring plan for corporate borrowers until 31st December 2020 and implement it until 30th June 2021. However, note that the loan accounts have to be classified as standard until the date of invocation.  

Which loans are eligible for restructuring? 

The one-time restructuring window applies to all loans across sectors. It applies to all personal and corporate loans that have come under stress due to Covid-19. It includes personal loans, home loans, gold loans, education loans, car loans, consumer durable loans, loans against property, etc. 

However, note that a few loans are NOT eligible for this offer. They are:

  • Loans taken by MSMEs and financial services providers with a total outstanding of less than Rs. 25 crores

  • Loans to government bodies

  • Farm credit

  • Loans to FSS (Farmers’ Service Societies) or PACS (Primary Agricultural Credit Societies) 

Which banks offer RBI loan restructuring? 

RBI has authorised all commercial banks in India, including public sector banks, private banks, foreign banks, state co-operative banks, urban co-operative banks, regional rural banks, district co-operative banks, housing finance companies, and NBFCs to use this facility.

What are the benefits for an individual borrower under the restructuring? 

The biggest benefit for individual borrowers is that restructuring existing loans will alleviate financial stress due to Covid-19 induced salary cuts or job loss. Getting your ongoing loan restructured will help you manage your finances better if you're facing a severe cash crunch.

Borrowers can opt to:

  • Reschedule loan payments 

  • Reduce EMIs temporarily and increase it later on

  • Extend the loan tenure 

  • Convert interest accrued (or to be accrued) into a manageable small loan

  • Moratorium on EMIs (for a maximum of up to two years) 

When a borrower gets his loan restructured, it will still be maintained as a “standard” loan and not classified as a default. 

How to apply for loan restructuring? 

Eligible borrowers can approach their lenders within the window i.e., before 31st December 2020, to avail the restructuring benefits. The lenders will evaluate each request on a case-by-case basis and decide the terms and conditions. 

However, note that lenders have to draw up the restructuring or resolution plan within 90 days of receiving the request. If the lender fails to comply with this time limit, they will not be able to avail any benefits under the Covid-19 restructuring scheme. They will have to declare the loan account as default.

How does restructuring of corporate loans work? 

Corporate borrowers have to request their lenders for a restructure. All lenders who have granted loans to the corporate borrower must sign an intercreditor agreement within 30 days of agreeing to the restructure. The proposal for recasting the loan has to be approved by at least 60% of lenders, representing 75% of the loan value. 

Suppose the inter-creditor agreement is failed to be signed within 30 days of receiving the restructuring request. In that case, the borrower is not eligible for the recast. Corporate borrowers whose application for restructuring has been declined cannot apply again within this time-frame.  

If the lenders approve the restructuring, corporate borrowers can opt for:

  • A repayment moratorium window

  • Changes in the terms of an ongoing loan

Just like for individual borrowers, the restructuring will not cause the accounts of corporate borrowers to be classified as NPAs. Once approved, lenders must implement the restructuring plans within 180 days for corporate borrowers. 

Is the RBI offering support to banks for restructuring? 

Yes. The RBI has appointed an expert committee to guide banks on how to implement the restructuring. The committee will provide a list of parameters to help banks create resolution plans. Additionally, the committee will also offer sector-specific help. 

How does restructuring impact banks? 

Under current rules, banks/lenders have to set aside 15% of the total loan value when a loan account is restructured. This amount acts as a buffer to prevent banks from NPAs. However, during this one-time window, RBI has relaxed the amount to be set aside. It has been reduced from 15% to 10%. 

A Word of Caution - Restructuring may lead to Higher Interests

Though the interest rates of retail loans have fallen down, banks state that borrowers who opt for restructuring will not be able to avail the best rates. This is because lenders will have to make an additional provision of 10% for recast loans. So, borrowers are likely to incur 30 basis points higher interest on restructured loans. 

The Bottom Line 

The one-time restructuring offer by the RBI is a welcome move. It will be highly beneficial to borrowers who are dealing with liquidity issues due to the Covid-19 pandemic. However, the restructuring terms are at the discretion of each lender. Banks can choose to extend the loan tenure, convert interest accrued into another small loan, reschedule loan repayments, or even extend the moratorium up to two years. 

RBI restructuring is a massive boon for borrowers whose salaries have been cut due to the pandemic, or those who have lost their jobs. However, if you are able to repay your loans as before, then it’s highly recommended that you continue doing so, to avoid accruing an increase in interest rates. 

If you need a loan recast, contact your lender to check if you're eligible for this scheme and negotiate a restructuring plan.