Your bank will decide how to recast your Coronavirus hit loan

The RBI has proposed a separate resolution plan for personal loans stressed due to Covid 19. The plan is to be chalked out by the concerned lending institution as per announcement made by the RBI.

Therefore, the moratorium on loan EMIs offered across the board to individuals earlier, has not been extended and will expire as scheduled at the end of August, 2020. If the borrower is unable to pay EMI after the end of moratorium, he/she can opt for loan restructuring as per the resolution plan offered by his/her lending institution. The resolution plan may vary from individual to individual and from bank to bank.

Here’s what this would mean for borrowers as per experts.Shalini Gupta, Chief Strategy Officer, MyLoanCare says, “As per announcement by RBI on the restructuring of loans, banks have been allowed to work out a restructuring plan for personal loans as well. However, banks will decide to whom to offer this benefit and what will be the new terms and conditions.”

She further adds, “The borrower needs to understand the difference between EMI moratorium and loan restructuring

Under the former, the borrower is not required to pay any EMI amount during the aforesaid period and the interest accrued during such period will be added to the principal loan amount and interest will be payable on it once the EMI payment starts. However, under the restructuring of loans, bank have the flexibility to decide on the kind of restructuring it wants to offer to their customers which could be one of the many options like reducing EMI amount for a few months, extending the loan tenure, accept interest only EMIs or adjusting rate of interest etc.”

Kunal Varma, CBO and Co-founder, MoneyTap says, “Loan restructuring would be the right choice for those who are unable to pay large EMI sums due to economic hardships. With the extension of the residual loan tenure, hopefully, they will be able to gradually get back on their feet and get back to repaying their loans regularly. However, the maximum extension under restructuring is two years, so borrowers who have opted for the moratorium will not see a huge reduction in their EMIs as their remaining principal amount would be higher.”

“The EMI moratorium on loans will expire as scheduled on August 31, 2020. If the borrowers are unable to pay their regular EMIs after the end of the moratorium, they can approach the lenders any time before December 31, 2020 to avail such restructuring of loans. Loan restructuring is to be offered at lenders’ discretion keeping in mind a borrower’s financial impact and eligibility,” adds Varma.

Naveen Kukreja- CEO and Co-Founder, says, “The stress resolution framework for personal loans announced by the RBI would only apply to personal loan borrowers facing repayment difficulties caused by the pandemic. Personal Loan here will cover gold loan, education loan, home loan, personal loan, consumer durable loan, car loan and loan against securities. It will not include loans sanctioned for business and commercial purposes. Also, borrowers should note that loans in default for more than 30 days as on March 1, 2020 will not qualify for this plan.”

He further adds, “Under the restructuring plan, banks can choose to reschedule loan repayments, convert any interest accrued or to be accrued into another credit facility, extend the loan tenor, or extend moratorium up to 2 years for the existing loans, depending on the current repayment capacity of the borrower. This should cover the bulk of the existing loans sanctioned to individual borrowers and help them repay their loans as per their changed repayment capacity caused by the current pandemic.”

According to the statement on regulatory policies issued by the Central bank, the resolution framework for personal loans will work as follows:

1. The parameters of the resolution plan for personal loans are to be decided by the concerned lending institution based on their Board approved policies. However, the resolution plan will be subject to extension of the residual tenor of the loan, with or without payment moratorium, by a maximum period of two years. Varma says, “This would mean that if the bank allows restructuring then the extension of tenure of repayment of loan cannot exceed more than two years irrespective whether the borrower has opted for moratorium or not.”

2. The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter. Thus, a borrower can approach the bank only up till December 31, 2020 to avail such restructuring of loans.

3. The lending institutions are, however, encouraged to strive for early invocation in eligible cases, as per the RBI statement issued today. The time for implementation of resolution plan in case of personal loans is considered enough because unlike larger corporate exposures, there will not be any requirement for third party validation by the Expert Committee, or by credit rating agencies, or need for ICA. Varma says, “What this means is that it will be banks’ prerogative to decide to what borrowers such benefit has to be given. Further, the guidelines of giving such benefit will vary from bank to bank and individual to individual.”

What RBI has earlier announced The RBI back in March 2020 announced the moratorium on all term loans on EMI between March 1, 2020 and May 31, 2020. This moratorium was further extended by three months till August 31, 2020. Therefore, in total, the central bank has offered the moratorium on six monthly instalments starting from March 1, 2020 to August 31, 2020.

The moratorium benefit was aimed to provide relief to many, especially those who are self-employed, as they would have found it difficult to service their loans like car loans, home loans etc. due to loss or shortage of income during the nationwide lockdown period from March 25, 2020. Missing an EMI payment would mean risking adverse action by banks which can adversely impact one’s credit score as well. The central bank further clarified that such treatment will not lead to any changes in the terms and conditions of the loan agreements, which will remain the same as announced in and for the previous moratorium extension period.