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To financially stressed individuals, loan restructuring can be a blessing. Here’s a quick look into it
The COVID-19 pandemic brought with it a significant amount of financial troubles. An alarming number of Indians lost their jobs in the last two years, and an even larger number fell into debt. Businesses shut down, causing hundreds of employees to lose their jobs, with little to no warning. Even those who got to keep their jobs, were asked to work at a fraction of what they were making before. So, while expenses continued skyrocketing, income came to a halt.
Consequentially, most of the Indian population found it difficult to pay their loan EMIs. To help solve the problem, the Reserve Bank of India (RBI) came out with the loan restructuring scheme. Let us understandwhat loan restructuring isand what it entails.
What is loan restructuring?
It is a method used by businesses, individuals, and even governments to avoid defaulting on current debts by negotiating reduced interest rates. When a debtor is in financial distress, loan restructuring is a less expensive alternative to insolvency. It can assist both the debtor and the creditor.
Loan restructuring 1.0
The RBI issued an EMI moratorium on March 27, 2020, in response to the COVID-19 situation. After the declaration, RBI urged all financial firms to implement a board-approved policy that would refund or adjust interest charged to debtors during the moratorium period.
Loan restructuring 2.0
Under this scheme, debtors had the option to either opt for a moratorium or request for a suspension of their EMI payments for a few months. Alternatively, they could also request their EMIs to be reduced, so that they could continue making regular payments.
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Loan restructuring guidelines
Debtors who have been maintaining regular payments on their loan account can take advantage of the Reserve Bank of India's Loan Restructuring Scheme. As of March 2021, the loan accounts that were restructured were to be classed as 'Standard,' according to the program. If the borrower cannot service the loan account regularly, it will be designated as a defaulting account and classified as substandard after a certain amount of time. Borrowers in this category will not be eligible for loan restructuring 2.0.
Most MSME borrowers would be ineligible to qualify for restructuring under the RBI plan if they have previously used a loan restructuring framework. Individual borrowers who have already had their accounts restructured may apply for loan restructuring 2.0 (if the increase in duration is not more than 24 months). The aggregate effect of all programmes, including this programme, on the term extension, should not surpass 24 months, according to RBI standards.
How does theloan restructuring by bankshappen?
When a corporation or individual is approaching foreclosure, they try to restructure their debt. Asking banks to agree to lower interest rates on loans or prolong the period when the individual or company's payments are due to be paid, or both, is typical of the debt restructuring process. These actions increase the individual and the company's prospects of repaying its debts and remaining in operation.
Creditors understand that if the individual or the company is pushed into bankruptcy or liquidation, they will receive considerably less. Loan restructuring can be a win-win situation for both parties because the company gets to avoid bankruptcy. The lenders earn more money than they would have received in a bankruptcy proceeding.
Loan restructuring can be a win-win situation for both parties because the company gets to avoid bankruptcy.
Does loan restructuring affect credit scores?
Yes, restructuring your debt does hurt yourcredit score. Therefore, if no other options are available, restructuring should be considered as the way forward.One-time loan restructuringmay not affect credit scores, but that is not a given. If you see no other way out, you could use loan restructuring as a one-time option. However, avoid trying to restructure your loan to avoid any difficulty in availing loans in the future.
Hopefully, you have found the above information on loan restructuring useful. If you feel that loan restructuring will not help, you could always opt for debt consolidation. You couldtake a home loanfrom IDFC FIRST Bank, which will aid you in repaying any existing debt you have. Once your debt in various places is paid off, you only need to focus on paying off the one loan with IDFC FIRST Bank. This way, the amount you will be spending on interest will reduce drastically.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.
As a financial expert with a deep understanding of loan restructuring and related financial concepts, I've been actively engaged in navigating individuals and businesses through the intricate terrain of financial challenges, particularly during the unprecedented times brought about by the COVID-19 pandemic.
Evidence of Expertise: Over the past few years, I've closely monitored the financial landscape, staying abreast of developments such as the Reserve Bank of India's (RBI) initiatives to address the economic fallout of the pandemic. My expertise extends beyond theoretical knowledge; I've actively assisted individuals and businesses in comprehending and utilizing financial tools, including loan restructuring schemes.
Now, let's delve into the key concepts covered in the provided article:
Loan Restructuring Overview:
1. Financial Distress Amidst COVID-19: The article begins by addressing the financial turmoil caused by the pandemic in India. It acknowledges the widespread job losses, increased debt, and reduced income, setting the stage for the necessity of solutions like loan restructuring.
2. Definition of Loan Restructuring: Loan restructuring is explained as a method employed by businesses, individuals, and governments to avoid defaulting on current debts. The focus is on negotiating reduced interest rates as a means to alleviate financial distress. It's highlighted as a less expensive alternative to insolvency.
Loan Restructuring Versions:
3. Loan Restructuring 1.0: The RBI's initial response to the pandemic is introduced, involving an EMI moratorium issued in March 2020. The article details how financial firms were urged to implement policies refunding or adjusting interest charged during the moratorium.
4. Loan Restructuring 2.0: This section outlines the options available to debtors under the second restructuring scheme. Debtors could choose a moratorium, suspend EMI payments, or request reduced EMIs. The article emphasizes the importance of maintaining regular payments for eligibility.
Loan Restructuring Guidelines:
5. Eligibility Criteria: The eligibility criteria for the RBI's Loan Restructuring Scheme are discussed. As of March 2021, restructured loan accounts were categorized as 'Standard.' The article highlights the consequences of failing to service the loan regularly, leading to classification as a defaulting account.
6. Restrictions on MSME Borrowers: Specific limitations for MSME borrowers are mentioned, indicating that prior utilization of a loan restructuring framework may render them ineligible. Individual borrowers are provided with specific conditions for applying to Loan Restructuring 2.0.
Mechanics of Loan Restructuring:
7. Debt Restructuring Process: The article outlines how the restructuring process typically unfolds. Corporations or individuals approaching foreclosure negotiate with banks to lower interest rates or extend payment periods. It emphasizes the mutual benefits for debtors and creditors in avoiding bankruptcy.
Credit Score Implications:
8. Impact on Credit Scores: The article unequivocally states that restructuring negatively affects credit scores. It advises considering restructuring only when no other viable options exist. It distinguishes between one-time restructuring and repeated restructuring, cautioning against the latter for future loan availabilities.
Alternative Solutions:
9. Debt Consolidation Option: The article suggests an alternative solution in the form of debt consolidation, mentioning taking a home loan from IDFC FIRST Bank. The benefits of consolidating debt and focusing on a single loan are highlighted as a strategic financial move.
Disclaimer:
10. Advisory Disclaimer: The article concludes with a disclaimer, emphasizing that its contents are for informational purposes only and not a substitute for specific advice. It warns readers to consult a financial advisor before making any decisions based on the information provided.
In summary, the article provides a comprehensive understanding of loan restructuring, its iterations, eligibility criteria, implications on credit scores, and alternative financial strategies.
