What is Loan Restructuring Scheme and What are Its Impacts?

After the COVID-19 pandemic, people across the world are facing an economic crisis. To address the crisis and business loss the RBI has announced relief to MSME loan debtors by offering a loan restructuring plan. Under this plan, banks can change the loan repayment terms depending on the agreement. The scheme is beneficial for those who are seriously impacted by the pandemic. 

Loan Restructuring Scheme:

The borrowers facing trouble in paying their debt can now repay as per the changed repayment capacity. Borrowers have to sign an agreement with the lenders which may include the rescheduling of EMIs, lower interest rates, conversion of interest into another loan, or loan moratorium to a maximum of two years.

The scheme is applicable to all stressed accounts of personal and corporate loans. Lenders can do this change in repayment terms even if it is a standard account. Also, it will not be tagged as defaulter or NPA. 

This restructuring window is available till 31st December, 2020. The scheme can be availed in all banks including the public, private, corporate, and foreign banks operating in India. Also, the loan account needs to be a standard loan and should not have been in default for more than 30 days on March 1, 2020. It simply means that this facility is not for the debtors who were already having difficulties in making payments before the pandemic.

Impacts of the restructuring scheme: 

  • Notice that the borrowers who look for the benefits under restructuring will be mentioned as ‘restructured’ in the credit reports. It may result in lowering the credit score of the borrower. Such accounts may get affected in the future due to their credit report. It may lead to the lowering of CIBIL score which means chances for availing future loans get reduced. All you can do to improve your credit score is to ensure that you repay your EMIs on time after the recast. If possible, then avoid taking new loans as the credit score will improve with time.
  •  After utilizing the scheme of restructuring borrowers have to face new challenges of high cost and interest. This is because the restructured loans have a processing fee that comes out to be a higher interest rate than the current one. Consequently, the restructured loan borrowers have to face a higher repayment period and the overall interest paid during the duration of the loan will also increase.
  •  After the implementation of the scheme there will be the biggest impact on lenders or banks. In maintaining the additional provisions, the burden of banks is increased. For post-resolution debt, banks will have to maintain additional 10% provisions, and lenders that do not sign the Inter-Creditor Agreement (ICA) within 30 days of invocation will have to maintain a 20% provision.
  • There are various plans and procedures for restructuring so go through all the options offered by the lender. It is advised to implement suitable restructuring management as per the need of the organization. Also, opt for rescheduling of loan repayments only if you have a plan of being disciplined.

After the extensive stress caused to the economy in India, it requires a more targeted and long-term approach for solving the liquidity related issues faced by the existing borrowers. Furthermore, utilizing the restructuring scheme will certainly affect the credit history and score of borrowers adversely, but not as much as if it would become an NPA. Thus, it is a must to clarify the process and other relevant instructions before implementation.

Conclusion:Present challenges of the market enforce adapting to new standards and circumstances. Thus, it would not be wrong to say that restructuring is a good option for businesses to stay in the market. Just observe the market and chose the best restructuring strategy in order to seek advantage, but without unnecessary problems and there are negative implications of the scheme that could possibly ruin the organization’s growth. 

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