Restructured Loan in CIBIL and Its Impact on Credit Score

Yes, loan restructuring can impact your CIBIL score. It may be marked as ‘restructured’ on your report, indicating financial distress. While the impact can be temporary, making timely payments under the new terms can help improve your score over time.

When a loan is restructured, it can have a significant impact on your CIBIL score. While it may offer relief during financial difficulties, it’s important to understand how loan restructuring affects your credit report. A restructured loan in CIBIL is a crucial factor that can influence your creditworthiness, and knowing how it impacts your credit score is essential for future financial planning.

Yes, a restructured loan does impact your CIBIL score. When a lender agrees to modify the terms of your loan, this could include extending the tenure, reducing the interest rate, or changing the repayment structure. This information is then reported to the credit bureaus, including CIBIL.

This is often recorded as a restructured loan in your CIBIL report, which can signal to other lenders that you have previously faced financial distress. Although a restructured loan may prevent missed payments or defaults, it is not seen favourably by future lenders and may negatively affect your credit score. 

It’s essential to remember that a loan modification can hurt your credit, but the severity of this impact largely depends on how you handle repayments after the restructure. Making timely payments is crucial to minimise the effect on your score.

The Reserve Bank of India (RBI) offers loan restructuring schemes to help you adjust your repayment terms according to your financial situation. This may involve rescheduling your EMI payments, lowering interest rates, or introducing a moratorium period during which you won’t need to make payments. In some cases, accrued interest may be converted into a separate loan.

The loan restructuring framework was initially introduced to support MSMEs and individuals like you who were affected by the COVID-19 pandemic. It was extended in August 2020 to cover a wider range of borrowers.

Under the Loan Restructuring Framework 2.0, RBI allows your lender flexibility in deciding key terms such as:

• The moratorium period
  

• Adjustments to the repayment schedule for your principal
  

• Potential increases in interest rates for your restructured loan
  

• Additional processing fees on restructured loans

While restructuring can provide relief, it’s important to understand that it may negatively impact your CIBIL score, particularly when a restructured loan is noted in your credit report.

In your CIBIL report, a restructured loan is typically marked as "restructured." This can negatively impact your CIBIL score and may make it more difficult to obtain credit in the future.

If only one loan is restructured, the lender may report all loans as "restructured," signalling financial distress. This is viewed unfavourably by lenders who assess your credit report. While the restructured status on your credit report can affect your chances of approval for new loans or credit cards, it’s still a better option than defaulting on the loan, which would cause a more significant drop in your score.

To qualify for loan restructuring under the current RBI guidelines, you must generally meet the following criteria:

• Entities Facing Financial Difficulties

You should be experiencing financial difficulties due to significant disruptions such as the COVID-19 pandemic, natural calamities, or sector-specific downturns. Your lender will assess your financial viability before granting eligibility for restructuring.

• Loan Account Status

Your loan account must have been classified as ‘Standard’ (i.e., not overdue) as of the relevant cut-off date, typically March or April 2021 for most restructuring schemes linked to COVID-19 impacts. This classification ensures that your loan is in good standing prior to restructuring.

• Borrowed Amount Limit

If you are a business, MSME, or other eligible entity, your total outstanding borrowing from banks and financial institutions should not exceed ₹25 Crores as of the relevant cut-off date.

• Prior Restructuring

You must not have availed of any previous loan restructuring under earlier RBI restructuring frameworks. Multiple restructurings are generally restricted, and approval for further restructuring will depend on your lender’s assessment.

• Moratorium Extension

If you’ve previously received a moratorium period of less than 2 years under any restructuring schemes, you may be eligible to request an extension of up to 2 years, subject to lender approval.

Eligible Lenders:

• Scheduled Commercial Banks (excluding some Regional Rural Banks in certain cases)

• All-India Financial Institutions such as NABARD, NHB, EXIM Bank, and SIDBI

• Small Finance Banks

• Systemically Important Non-Deposit Taking NBFCs (NBFC-ND-SI)

• Deposit-Taking NBFCs (NBFC-D)

Important Notes:

• Restructuring schemes introduced in response to COVID-19 impacts mostly had application deadlines around 2021-2022. While some provisions continue, new restructuring requests are subject to updated RBI notifications and lender policies.

• Eligibility and approval for restructuring requests are subject to your lender’s discretion, the documentation you provide, and their assessment of your financial condition.

• It’s advisable to contact your lending institution promptly to verify your eligibility and initiate the restructuring process if applicable.

While loan restructuring provides relief in tough times, there are several disadvantages you need to consider:

• Impact on Credit Score

Loan restructuring effect on CIBIL can primarily be seen with a drop in your credit score. Although less damaging than a default, this negative mark can affect your future borrowing opportunities.

• Potential Interest Rate Increase

Your lender may increase the interest rate for restructured loans, meaning you could end up paying more in the long run despite the temporary relief.

• Extended Loan Tenure

While extending your loan tenure reduces monthly payments, it also means you’ll be in debt for a longer period, possibly resulting in higher total interest payments.

• Additional Fees

Some lenders charge processing fees or other hidden charges for loan restructuring, adding to your financial burden.

• Difficulty in Future Borrowing

The restructuring status on your credit report may make it difficult for you to qualify for future loans or credit cards. Lenders may view you as a higher-risk borrower.

• Loan Terms May Not Be Fully Favourable

While restructuring offers some benefits, it may not always lead to the most favourable terms. In some cases, you might find that the modified loan terms still don't align well with your financial situation.

Here are some essential tips to ensure that the loan restructuring process goes smoothly for you:

Check the Associated Costs

Loan restructuring can offer short-term relief, but it may also increase your long-term repayment costs. If the bank increases your interest rates, the total cost of your loan rises accordingly. In the case of a moratorium, the interest that is not paid adds up, increasing the principal amount. You may also be charged an extra processing fee for restructuring your loan, which adds to your financial burden.

Consider Other Alternatives

Before opting for loan restructuring, consider alternatives like a loan balance transfer or debt consolidation. You can also explore other sources of income or work on reducing your expenses. However, if your cash flow is impaired and there are no viable alternatives, loan restructuring can be a helpful option to manage your debt more effectively.

Track Your CIBIL Score

Regularly check your CIBIL report to monitor your credit score. A loan restructuring may cause a temporary dip in your score, but your score can improve once you resume timely EMI payments after the moratorium. 

Try to lower your credit utilisation ratio and make sure to pay your credit card bills on time. This will help you avoid further damage to your score. By consistently monitoring and improving your score, you’ll be in a better position to secure new credit in the future.

After restructuring your loan, it’s important to work on improving your CIBIL score. Here’s what you can do:

• Make Timely Payments

Ensure you make your restructured loan payments on time. This demonstrates your commitment to managing your debt and can help improve your score over time.

• Avoid Accumulating New Debt

Try not to take on additional debt while you’re working on rebuilding your credit.

• Reduce Credit Utilisation

Keep your credit utilisation ratio low by paying off credit card balances regularly.

• Review Your Credit Report

Monitor your CIBIL report for any errors or discrepancies that may affect your score, and dispute them promptly.

Loan restructuring can provide much-needed relief in tough financial times, but it’s important to consider the potential long-term impact on your CIBIL score and overall finances. By understanding the costs associated with restructuring, exploring other alternatives, and actively managing your credit, you can ensure that your financial health remains stable while you recover from financial setbacks.