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The loan moratorium introduced by the Reserve Bank of India came to an end on August 31st 2020. This was done to allow some leeway for those who had borrowed and had found themselves under financial duress due to an inability to pay back their loans. Furthermore, the RBI allowed for personal loan borrowers to restructure these loans once the loan moratorium ended.

The solution offered by the RBI for those unable to service a personal loan even after the 31st of August is to opt for loan restructuring. The restructuring itself will vary depending on the bank with which the deal has been made and the onus of initiating the restructuring falls on the borrower to approach the lender to create the plan as per their needs.

The RBI’s Resolution Framework for the pandemic related stress clearly states that the EMI moratorium and restructuring of personal loans will only be available to those borrowers who were making regular repayments as of March 1st, 2020.

Loan Restructuring vs. Loan Moratorium

A loan moratorium allows borrowers not to pay their EMI in spite of the loan interest continuing to build and increase upon the initial principal amount. Once this period lapses, borrowers would be required to pay their EMIs as per usual. Loan restructuring, however, allows borrowers to modify the initial terms and conditions of their payment process regarding a personal loan. That is, the repayment must continue, but with exceptions of concessions as agreed upon by the borrower and the lender. For example, some banks may choose to decrease the EMI while lengthening the payment period or may even reduce the interest rate in order to offer some relief to the borrowers so they do not struggle to make ends meet. This depends upon the agreement between the bank and the individual.

Loan restructuring is a step in the right direction for those who are affected by the economic downturn brought about by the onset of the pandemic. Restructuring loans is beneficial for banks as well since it reduced the number of loans that would have been considered NPAs or non-performing assets when tallied at the end of the year.

Will this lead to increased payments?

As per the EMI moratorium announced by the RBI, the interest on a borrowed sum will continue to accumulate during this period. The deferred instalments only count for payments that cannot be committed to between 1st March and 31st August 2020.

The payments that the loan moratorium is valid for are:

  1. Principle and/or interest components
  2. Bullet repayments
  3. Equated monthly instalments
  4. Credit card payments

The deferred payments will not lead to any criminal charges for the borrowers and it will not change their CIBIL score either. However, it is important to understand that those opting into the loan moratorium will continue to accumulate the interest on their debt sum. This implies that the overall interest cost will increase during this time. The reason behind the EMI moratorium period being stopped in August itself was to ensure that the borrowers have enough liquidity to repay the existing personal loans if they didn’t opt for the loan restructuring and go back to following their regular payment schedule.    

Alternatives to loan restructuring

There are three options for those that don’t opt for restructuring:

  1. One-time bulk payment for the accumulated interest that should be paid from September 1st 2020.
  2. Increase the amount of EMI payments but add the accumulated sum to the outstanding loan payments and pay the same for the remainder of the loan tenure.
  3. Increase the tenure for repayment in order to account for the accumulated interest and the outstanding dues to pay back the borrowed sum.

The benefits of opting for loan restructuring

In order to reduce financial distress, renegotiating one’s debts can help in the following ways:

  1. Avoid the risk of defaulting on an existing loan
  2. An extension has been offered on the repayment tenure
  3. Liquidation is maintained for the individual to continue with the needs of their day to day life
  4. The Reserve Bank of India, in its Financial Stability Report, mentioned that the non-performing assets from banks, which were initially reducing steadily, could once again begin to increase to 12.5% by March of 2021.

Essentially, loan restructuring could be beneficial to both the borrower of the personal loan to continue their repayments with reduced stress, as well as for the lending institutions to show for non-performing assets this financial year.

If you are someone who has opted to apply for a personal loan and now needs to decide whether to opt for loan restructuring, it would be critical to check your EMI to plan for your payments. You can calculate personal loan EMI in a simple way. All you need to do is to input your loan amount, rate of interest and tenure of the loan. The benefit of using the Personal Loan EMI Calculator is that once you have a clear estimate of your EMI payments, you can negotiate on the rate of interest or loan tenure during loan restructuring in order to meet your payments regularly.

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