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The moratorium offered by banks and other institutional lenders ended last month. However, the economic disruption caused by the pandemic and the resultant income and job loss continue to a large degree.
In this scenario, the Reserve Bank of India (RBI) has announced a loan restructuring plan to offer relief to impacted borrowers, who may struggle to repay their debt over the short term, at least.
This plan is unique in many ways. Unlike the earlier restructuring windows with a largely open-ended structure, the latest resolution framework has a strict entry barrier and a clearly defined timeline for the implementation of the scheme.
Also, unlike the moratorium on term loans that was open for all, only those borrowers whose income has been adversely impacted due to the pandemic and repayment capacity seriously restricted would be eligible for the loan restructuring scheme offered by the lender.
This is also the first time that the RBI has announced a resolution plan specifically for retail loans.
The primary objective of the loan recast plan is to provide a holistic solution to the liquidity and viability-related issues faced by existing borrowers in the personal loan segment, along with the corporate and MSME loan categories. The RBI has acknowledged the need to address the deeper cash flows issues faced by borrowers, a large section of whom have an otherwise good repayment history. According to RBI’s Financial Stability Report released in July , about 50% of individual loan borrowers had availed themselves of the moratorium as on April 30.
As a result, most banks and institutional lenders would have feared a significant rise in NPAs in the next few months. But, if implemented well by lenders, the restructuring plan will allow the lending system to spread the probable systemic shock over a longer period of time. Hopefully, the plan will not only provide huge relief to the genuinely- stressed borrowers but also help maintain the overall health of the lending sector.
Currently, most lenders, including the large banks, are being cautious in issuing new loans. Only borrowers with a steady income, who have been unscathed by the pandemic financially and have a solid repayment history are predominantly being catered to. This is likely to continue till the time lenders have a clear picture of the repayment capacity of existing borrowers, which should happen over the next couple of months.
In the RBI’s lexicon, the term ‘personal loan’ includes gold, education, home, personal, consumer durable and car loans, credit card dues and loan against securities (other than those sanctioned for business and commercial purposes).
Loan recast goal
The objective of the loan restructuring plan is to clearly provide relief to the maximum number of retail borrowers, who may struggle to service existing debt, by allowing them to repay as per their changed repayment capacity. The RBI has outlined a broad framework for the lenders to resolve the stress in personal loan assets.
Lenders may provide relief to impacted borrowers by rescheduling loan repayments, conversion of any interest already accrued or to be accrued in future into another loan and through granting loan moratorium subject to a maximum of two years.
This is only a broad framework and personal loan borrowers would need to wait for their lender to announce details on the various options that may be available and the associated eligibility criterion.
However, any restructuring one goes for will come at a price such as higher interest cost and may have a long-term implication on the financial future. Hence, only those genuinely affected by the COVID-19 crisis and struggling to repay debt should opt for loan resolution.
Borrowers should also consider the fact that the loans taken up for restructuring will be reflected in credit reports as ‘restructured.’ This is likely to have an adverse impact on credit score and thereby, borrowers’ chances of availing another loan or credit card may plummet significantly in the future.
My advice for those whose income has been considerably impaired is to opt for rescheduling of loan repayments. Be disciplined and start repaying according to your reduced repayment capacity. Only those who have no, or little, means to make repayments over a longer time horizon should opt for the moratorium. But do go through the various options available with your lender, before taking a decision.
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