Home Loan Restructuring during covid-19 in 2021

Are you going through financial distress and not able to continue loan repayment?

If yes, you need a Home Loan Restructuring scheme launched by the Reserve Bank of India first in March 2020 and second in May 2021. Covid-19 has changed the world forever, leaving a lasting effect on loans, businesses, and jobs.

We will begin the blog with the definition of Loan Restructuring and continue with RBI steps during ‘Corona Kaal’, comparison with Moratorium, and more.

What is Loan Restructuring?

Banks and Loan distributors assess the financial situation of the borrower affected due to Corona as per RBI guidelines. They come up with a resolution and restructure the loans for individual and small businesses. A Moratorium is a part of the restructuring scheme that defers payment of EMIs for a certain period of time as decided by RBI and Lenders.

Loan Restructuring by the Reserve Bank of India

Reserve Bank of India has announced several measures for distressed individual and small business borrowers. As RBI Governor Mr Shaktikanta Das puts it, “restoring livelihoods has become an imperative”. Loan restructuring by RBI was a significant step to support people who have lost jobs, income, businesses due to the pandemic.

In his briefing, he announced Resolution Framework 2.0 targeted specifically the Corona-related stressed individuals, businesses, and MSMEs.

Eligibility for the Resolution Framework 2.0

• Vulnerable borrowers with aggregate exposure of up to twenty-five crores, who had not applied for restructuring in last year’s resolution framework, and people whose loans were classified ‘’Standard’’ dated 31st March 2021, can apply for Resolution Framework 2.0 in 2021.
• Lenders can modify the plan for existing beneficiaries of restructuring plan 1.0 of 2020 for individual borrowers and small businesses. The period of Moratorium can be increased or extend the remaining tenure from last year up to two years.
• Resolution Framework 2.0 is a significant relief for borrowers because waves of Corona are still coming, and the third wave is around the corner as per WHO. Though the economy has recovered from last year’s negative growth, people are still losing jobs, suffering from salary cuts, and small businesses are struggling for survival.
• RBI has announced a one-time restructuring of loans for MSME and small businesses. Lenders need to assess working capital lifecycle, capital sanctioned limit, and margin to decide beneficiaries of the arrangement.

How to Apply for Loan Restructuring 2.0?

Borrowers can apply for Resolution Framework 2.0 and restructure their loans at the branch or contact the relationship manager.

The last date for application was 30th September, and there are no announcements regarding dates as of 14th October 2021 from RBI. So, contact your lender to know the details and update.

Advantages of Loan Restructuring through Resolution Framework 2.0

• Borrowers reeling under the pressure of paying EMIs and loss of income can get some respite by EMIs extension. The Moratorium allows them to stop repayment for some time, in Restructuring 1.0 RBI allowed six months of the Moratorium from March to August.
• Borrowers find it very supportive during cash crunch time.
• With easy repayment terms, borrowers can pay off loan amounts conveniently which helps lenders to reduce their Non-Performing Assets (NPA). So, it helps their books.
• Lenders restructure loans as per the financial situation of the lender. Borrowers can pay back loan amounts through mutual understanding and negotiations with lenders.

Things to Know before Applying for Loan Restructuring 

• Banks decide terms for the loan restructuring case to case basis. The rules can differ from one lender to another. Contact your relationship manager and ask about their process to grant loan restructuring.
• There is one term ‘interest on interest’ related to the Moratorium that you need to consider before applying. Banks charge interest during the Moratorium period, and accumulated interest is added to the principal amount payable after the Moratorium tenure ends. So basically, you end up paying much more than the actual loan amount.
• Hence it is advisable to apply for a Moratorium under restructuring under extreme financial distress. If possible, keep paying EMIs as decided at the time of the loan sanction.
• Another significant thing, Moratorium period extends your loan tenure. Suppose you took three months Moratorium; your total loan tenure extend by three months. Similarly, it can extend up to twenty-four months. So, consider the effect on loan paying tenure before applying for Resolution Framework 2.0.

Loan Restructuring vs Moratorium

• Loan Restructuring is an umbrella term for the additional credit facility, Moratorium, rollover credit facility, one-time loan adjustment. A Moratorium is a temporary arrangement to defer EMI payments for a few months.
• Loan restructuring depends upon the lender’s discretion. They assess the financial position, negotiate, and finalise terms for loan repayment. A Moratorium is comparatively more of a borrower’s decision.

One Time Loan Restructuring by Banks

• One-time settlement is a special loan restructuring scheme offered by the RBI. This is different from Moratorium 1.0 in 2020 because last year the scheme covered every individual borrower, and this year, banks can cherry-pick borrowers who can avail benefits of loan restructuring.
• Banks can grant a Moratorium of up to two years under one-time settlement under Framework Resolution 2.0 in 2021.
• The Loan restructuring 2021 covers consumer credit products such as credit card receivables, personal loans, vehicle loans, and consumer durables. Banks are also working on a restructuring plan for home loans, education loans and loans for investment in financial instruments.

Concluding Thoughts

Loan Restructuring is a much-required step by the Government and Reserve Bank of India. We hope you have already applied for the Resolution Framework 2.0 to avail of benefits for your loan repayment. Given the current situation and demand by lenders, it is unlikely that the period for Resolution Framework 2.0 will further extend.

It is also advisable that apply for a Moratorium only as the last resort. Try to pay EMI as scheduled in the loan agreement.