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Home Loan

Looking to restructure your Loan? Here is what you need to know

Summary: Loan restructuring scheme solves significant amount of financial troubles. Let us understand what loan restructuring is and what it entails. Read more!

11 Nov 2021 by Team FinFIRST

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 understand what loan restructuring is and 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. 

 

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 the loan restructuring by banks happen?


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 your credit score. Therefore, if no other options are available, restructuring should be considered as the way forward. One-time loan restructuring may 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 could take a home loan from 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 circumstances. 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.

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