SBI Loan Restructuring Scheme: How Does It Work? What Is the Impact?

SBI Many banks have come up with loan resolution / restructuring plans for Covid-19 related stress. The relief offered by the banks works within the Loan Resolution Framework due to Covid-19 related stress. We have written about the RBI framework in an earlier post. The eligibility criteria as specified by RBI must be met. The banks can add eligibility conditions to the RBI prescribed list.

In this post, I will write about the resolution scheme for SBI Loans.

SBI Loan Resolution / Restructuring: What Is the Eligibility Criteria?

I reproduce the list from SBI FAQs on Loan Restructuring for personal segment loans. Such loans would include housing and related loans, education loans, non-commercial auto loans and personal loans.

You must meet at least ONE of the following four conditions.

Your salary / income in August 2020 has reduced compared to February 2020
Reduction / suspension in salary during lockdown period
Job Loss / Closure of Business
Closure during lockdown / reduced activity of units / shops / business establishments in case of self-employed / professionals / businessmen

AND

Your loan account must be regular (not in default for more than 30 days) as on March 1, 2020.

As I understand, you will have to provide documentary evidence to support your eligibility. The intent of the RBI framework was to provide relief for Covid-19 related stress. Hence, you need to prove that Covid-19 (and the lockdown) has affected you financially. You may have to produce your bank account statements, salary slips, GST returns, Income Tax Returns to support your case.

The relief is not available for loans taken after March 1, 2020. While loan repayment of even such loans may be affected by the pandemic, such borrowers won’t get any relief under this scheme.

Your eligibility does not depend on whether you availed the initial moratorium of 6 months from March 1 until August 31, 2020.

Note that your eligibility does not guarantee that your restructuring application will be accepted. The bank retains the discretion.

How to Apply for the Relief? What Documents Do I Need? What Is the Last Date for Application?

Note this is only for SBI Loans. You can apply online from the SBI website. You will get an OTP on your registered mobile through which you can validate your information. Alternatively, you can apply from your home branch.

You need to furnish the following documents if you are applying from the bank branch OR upload these documents if you are applying online.

Salary slips for the month of February 2020 and current / latest salary slip.
A declaration of estimated salary / income immediately after the end of the desired moratorium period (Maximum 24 months).
Letter of discharge from job (in case of job loss).
Account statements of the account where salary is credited in case of salaried employees OR statement of Operating Account in case of businessmen / self-employed / professionals for the period Feb 2020 till 15 days prior to submission of application.
Declaration by self-employed professionals / businessmen declaring that their business is affected by Covid-19.

The last date to apply for relief under this scheme is December 24, 2020.

What Is the Relief Granted?

Now, this is the most important part. SBI will provide relief in either of the following 2 ways:

Loan Moratorium of up to 24 months (No EMI to be paid during the moratorium period)
Extension of loan tenure by up to 2 years. This will result in reduction on EMIs (Lower EMIs to be paid)

I do not know if you can specify your preference for Option 1 or Option 2 in your application. Or how the bank will evaluate your application.

Under Loan Moratorium, you do not have to pay anything to the bank until the moratorium is on. Just like the 6-month moratorium we had from March 1 until August 31. However, interest will be charged and get accrued to your principal (as it did for the moratorium from March 2020 until August 2020). Your loan tenure will be extended by the moratorium period. If you have availed the moratorium but have surplus cash during the period, the bank allows you to make loan payments. This will eventually help you save interest cost.

Under the second method, your loan tenure will be extended which will result in a lower EMI.

Will My Loan Interest Rate Go Up? Any Other Charges?

If you opt for restructuring, SBI will increase the rate of interest for your loan by 0.35% p.a. This is an additional cost. SBI will not charge any processing fee for such restructuring applications.

Does This Affect My Credit Score?

As I understand, your credit score will be affected if you opt for the loan restructuring. Your Loan account will marked as “Restructured” in CIBIL/credit reports. HDFC Bank and ICICI Bank have clearly specified this in their FAQs. SBI has not. I expect the treatment to be similar. This will affect you chances of accessing credit, at least in the near future.

Points to Note

Other banks may have different rules/relief program for borrowers. For instance, HDFC bank will charge a processing fee for considering your application. HDFC Bank does not offer the option of moratorium to its borrowers. The bank merely allows you to extend the tenure by up to 24 months. HDFC Bank FAQs make no mention of charging additional interest.

ICICI Bank FAQs make no mention of processing fee. The bank does not offer moratorium and will charge additional interest if the loan is restructured. The quantum of additional interest is not specified.

What Is the Impact?

As a borrower, you might want to assess the impact of restructuring before you make your decision.

1) Loan Moratorium

Here is the impact of moratorium. You do not pay anything to the bank for the period of moratorium. The loan tenure gets extended by the period of moratorium. The interest (0.35% extra) during the moratorium gets added to the principal. Once the moratorium is over, you must start paying the EMI. As you see from the table below, you get instant relief from payments. But you will have to pay a lot more once the moratorium ends.

Outstanding Loan Amount	5,00,000	10,00,000	50,00,000	50,00,000
Current Interest Rate	12%	12.0%	9.0%	9.0%
Remaining Tenor (months)	36	36	120	240
EMI	₹16,607	₹33,214	₹63,338	₹44,986
Revised Interest Rate	12.35%	12.35%	9.35%	9.35%
Monthly interest rate	1.03%	1.03%	0.78%	0.78%
Moratorium Period	12	24	24	24
Total Interest accrued during the period	65,368	2,78,564	10,23,769	10,23,769
Principal O/s at the end of moratorium period	5,65,368	12,78,564	60,23,769	60,23,769

EMI after the moratorium is over
New Interest Rate	12.35%	12.35%	9.35%	9.35%
Tenure (remains unchanged) (Moratorium period added to original tenure	36	36	120	240
EMI for the increased principal (New EMI)	18,873	42,467	76,307	54,197
Increase in EMI	2,266	9,252	12,969	9,211
Total excess payment over the loan tenure	81,569	3,33,083	15,56,241	22,10,668

2) Extend Loan Tenure

The second method (unlike the moratorium option where you do not have to pay any EMIs) provides rather limited relief. Only the loan tenure is extended which reduces your EMI. At the same time, the loan interest rate is increased by 0.35% p.a, which puts the upward pressure on EMIs. From the below table, you can see that the impact on EMI goes down as the loan tenure increases. For instance, for the Rs 50 lacs (20 year loan), the EMI falls by only Rs 265.

Outstanding Loan Amount	5,00,000	10,00,000	50,00,000	50,00,000
Current Interest Rate	12%	12.0%	9.0%	9.0%
Remaining Tenor (months)	36	36	120	240
EMI	₹16,607	₹33,214	₹63,338	₹44,986
Revised Interest Rate	12.35%	12.35%	9.35%	9.35%
Monthly interest rate	1.03%	1.03%	0.78%	0.78%
Extension in Loan Tenure	12	24	24	24

New EMI Calculation
New Interest Rate	12.35%	12.35%	9.35%	9.35%
New Loan Tenure	48	60	144	264
EMI for the increased principal (New EMI)	13,253	22,422	57,892	44,721
Fall in EMI	3,354	10,793	5,446	265
Total expected Loan Payment BEFORE restructuring	5,97,858	11,95,715	76,00,546	1,07,96,711
Total expected Loan Payment AFTER restructuring	6,36,144	13,45,303	83,36,392	1,18,06,371
Total excess payment over the loan tenure	38,287	1,49,588	7,35,845	10,09,659

Work out the expected relief before the apply for loan restructuring.