With the second Covid wave impacting lives and livelihoods, the Reserve Bank of India has made an attempt to provide relief to troubled borrowers. While the RBI has not opted for an outright EMI moratorium this time, it has allowed banks to restructure loans under Loan Resolution Framework 2.0. Loan resolution (or loan restructuring) schemes are not as simple to understand as loan moratorium scheme (March 1-August 31, 2020).
The loan moratorium scheme had blanket relief from EMI payments for 6 months. All the eligible borrowers across the banks/financial institutions got this relief. However, the nature of relief under the loan resolution/restructuring scheme will vary across banks. Your bank will decide what it offers you. The intent of any restructuring (or resolution) schemes is to make loan repayment easier for the borrower. The relief (as offered by the bank) can come in the form of moratorium on loan repayments or lower EMIs.
Remember, there is no free lunch. The banks won’t waive off your loan. And any relief (in any form) will have a cost attached. There might be a hike in interest rate. Or in case of moratorium, the unpaid interest will be added to your principal and increase your future EMI. In case of extension in loan tenure, you must pay the EMI for a longer duration. Net result: Your overall outgo towards the loan repayment increases.
However, the borrowers can still seek recourse under such schemes to avoid defaulting on their loans. Let’s find out more about Loan Resolution Framework 2.0.
Who Is Eligible for Loan Resolution Framework 2.0?
The borrowers (individuals, small business and MSMEs) with aggregate exposure of up to Rs 25 crores are eligible. The borrowings across the banking and financial services industry shall be considered. Additionally, following conditions must be met:
- Must NOT have availed restructuring under any of the earlier restructuring frameworks, including Resolution framework 1.0 (dated August 6, 2020) AND
- The loan account is classified as “Standard” as on March 31, 2021.
There is an exception to condition (1). For individual borrowers, who had availed relief under Resolution Framework 1.0 but the moratorium availed was less than 2 years, such borrowers can seek relief under this Resolution Framework 2.0 and get moratorium extended to 2 years.
The rest of the conditions shall be the same as for Resolution framework 1.0. The restructuring can be invoked until September 30, 2021. The date of invocation is the date when the borrower and the lender agree to the resolution plan. The implementation must be completed within 90 days of invocation.
The Banks Have a Lot of Discretion
Unlike EMI moratorium (that was offered from March 1, 2020 until August 31, 2020), the banks/financial institutions have a lot of discretion. Copying an excerpt from RBI Resolution Framework 1.0 (the conditions are the same for Framework 2.0).
The resolution plans may inter alia include rescheduling of payments, conversion of any interest accrued, or to be accrued, into another credit facility, or, granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years. Correspondingly, the overall tenor of the loan may also get modified commensurately. The moratorium period, if granted, shall come into force immediately upon implementation of the resolution plan.
So, the banks can extend the loan tenure by up to 2 years. They can decide the quantum of moratorium (up to 2 years). They can decide whether the moratorium is both on interest or principal or both. They can change the principal repayment schedule. They can charge a processing fee. They can hike the interest for restructured loans.
We discussed the SBI Loan Restructuring scheme under framework 1.0. You could choose between the two options:
- EMI moratorium of upto 24 months (no EMI to be paid)
- Extension of loan tenure by 2 years (longer tenure means lower EMI)
Under both the options, the loan interest rate increases by 0.35% p.a.
What Should You Do?
Any restructuring you seek will add to your costs. If your bank increases the interest rate, the cost of loan goes up. If your bank allows moratorium, the unpaid interest will accrue and add to the outstanding principal. Higher principal means higher interest outgo. Your bank can allow a moratorium and hike the loan interest rate too. Double whammy.
Unlike RBI EMI moratorium scheme (March 1 to August 31, 2021), there is no explicit protection from damage to credit score. Your loans will be reported as “Restructured” to the credit bureaus and this will impact your credit score adversely.
However, this is not the time for fancy excel calculations. You need to look at your cashflows. If you worry that your cashflows may not be sufficient to meet loan EMI payments, it is better to seek relief under this scheme. You do not want to default on your loan. Reach out to your bank and understand what they are offering. Make an informed decision.