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How Loan Restructuring Impacts CIBIL Score and Eligibility

By Finserv MARKETS - Nov 27,2020
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Loan Restructuring Impacts CIBIL Score

Reserve Bank of India (RBI) proposed a one-time loan restructuring on loans to ease the stress on borrowers who are facing financial difficulties. RBI allowed a one-time restructuring of loans after the six months’ moratorium facility that ended in the month of August. The RBI included personal loans for loan restructuring, they also stated that standard loan accounts that were not in default for more than 30 as on March 1, 2020, will be considered for the resolution plan and the process will be cited not later than December 31, 2020, and will be implemented within 90 days from the date of invocation.

The regulator allowed banks and lending institutions to retain these loans as “standard” on their books, which helps in lowering their non-performing assets (NPAs). Earlier banks would restructure loans given to retail borrowers only after they turned into non-performing assets (NPA). Lenders allowed loan restructuring only after they were convinced that the borrower intends to repay but needs some time and concession. Moreover, now it will be reported as “restructured” to the credit bureaus, these loans will get reported as restructured and may also have an impact on the CIBIL score and loan eligibility of the borrowers.

RBI Restructuring Plans

The following are the RBI’s resolution plans for loan restructuring:

  • Rescheduling of loan repayment tenures
  • Any interest rate charged, or to be accrued will be converted into another credit facility
  • Allowing a maximum of 2 years moratorium on loans based on the income of the borrower
  • The loan restructuring parameters will cover aspects related to leverage, liquidity, debt serviceability etc.

Loan Restructuring Eligibility

To avail the resolution plan you first need to check loan eligibility for restructuring

  • Loans applied with non-banking organisations (NBFCs) are eligible for restructuring.
  • Organisations that are eligible for loan restructuring plan are Commercial Banks, Small Finance Banks, Local Area Banks and Regional Rural Banks, all Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Co-operative Banks, Non-Banking Financial Companies and All-India Financial Institutions.

What Can Borrowers Do About It?

In the current arrangement for loan restructuring lenders don’t need to declare restructured loans as negligent, lowering NPAs, but the borrowers will be stressed with a lower credit score. Borrowers opting for loan restructuring can’t do much about their credit score. However, you can work towards improving it by ensuring that your EMIs are paid on time. Avoid availing any new loans, if possible, and gradually bring down your credit utilization to 30-40%. Credit utilisation shows the percentage of credit the borrower has availed of the total credit facility available. Borrowers will need to pay a fee for loan restructuring and the amount of interest a lender loses during the restructuring period will be added to the principal amount.

You can consider loan restructuring if you are unable to make repayments towards your loans due to financial shortage. However, this decision may depend on your overall financial situation and the types of loan restructuring your lender offers. Unlike a moratorium, where the loan restructuring can be availed by any borrower. In the RBIs framework, the lenders get to decide the relief that they want to provide to their borrowers. However, it may harm your CIBIL score because you are defaulting on the original loan agreement by agreeing to loan restructuring.

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