Are you in financial trouble? Ask your bank to restructure your loan asap

Take your repayment capability and the extra interest cost involved when choosing a restructuring option

The loan moratorium ends on August 31. Retail borrowers who had availed of it will once again have to bear the burden of paying equated monthly instalments (EMIs). Some borrowers may have lost their jobs or seen salary cuts and may be facing financial stress. There may also be borrowers who did not experience either of these events, but nonetheless chose to avail of the moratorium to conserve cash in these uncertain times. Each of these categories should respond to the end of the moratorium in different ways.

The Reserve Bank of India (RBI) has asked each bank to formulate its own policy on restructuring of retail loans. Borrowers should watch out for these norms from their bank. “Customers who are not in a position to start paying the full EMI will have to individually approach their bank and understand what kind of relief it can offer through restructuring,” says Raj Khosla, founder and managing director, MyMoneyMantra.    

Mildly stressed borrowers

Experts say banks will be more amenable to restructure the loans of borrowers whose payment capacity has reduced, but who can still pay some part of their EMI. You may have to demonstrate that your finances have been affected by the crisis. “The RBI has made it absolutely clear that only those borrowers who have been adversely impacted by the coronavirus crisis will be eligible for the restructuring of their loans by lenders,” says Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com.

Various restructuring options could be offered to retail borrowers. Say, you paid an EMI of Rs 50,000 on your home loan earlier but can now pay Rs 40,000. “One option would be that the bank will reduce your EMI and extend the tenure,” says Aditya Mishra, founder and chief executive officer, SwitchMe, a digital home loan broker.

Borrowers must, however, remember that banks have policies that restrict the maximum loan tenure they can offer. The maximum tenure could be 20, 25 or 30 year. Suppose that you have borrowed from a bank that allows a maximum tenure of 20 years, and extending your tenure takes it to 22 years. In that case, the bank will not offer you this option. Age is another key determinant. “Banks are generally reluctant to extend the tenure beyond the retirement age,” says Mishra.

A second form of restructuring could be that the balance (Rs 10,000 in the above example) gets added to your principal. You are allowed to pay a lower EMI for a specified period, say, six months or one year, after which the EMI climbs to a higher level--above what it was earlier, to make up for the extra interest cost incurred during the moratorium and after (the period of reduced EMI). This is referred to as the step-up EMI option. “Choose between these options--lower EMI and longer tenure, or lower EMI now and higher later--depending on your cash flows,” says Sovan Mandal, chief business officer, India Mortgage Guarantee Corporation (IMGC). Kukreja says that borrowers should also factor in the additional interest burden that will come with each restructuring option.

Borrowers who want their loans restructured should reach out to their bank at the earliest and explain their situation. This conversation should take place before September 10. If you delay it, you could get into deep trouble. Not only could your credit score get spoiled, your bank could even initiate repossession proceedings against you.   

Severely-stressed borrowers

What about borrowers whose financial situation is so severely stressed that they can’t pay any EMI at all? Will banks allow a further extension of the moratorium to them? Experts vary in their opinions. Some say banks could allow it, others are sceptical, and yet others say it could be offered only in exceptional cases.

Borrowers who are not stressed

Many borrowers had the money but availed of the moratorium to conserve cash. Once the uncertainty around their cash flows ends, such borrowers should use any surplus they have to prepay the bank. “To erase the burden of the additional debt you have incurred during the moratorium, aim to pre-pay within the next 12 months about 120 per cent of the EMIs you had to defer. So, if you deferred five EMIs, pre-pay six additional EMIs over the next 12 months. This will help you bounce back in your repayment plan and get out of debt quicker,” says Adhil Shetty, chief executive officer, Bankbazaar. Borrowers can also pay the accumulated interest upfront and continue with their regular EMIs. They may also opt to increase their EMIs so that the additional interest is offset and their loan tenure does not increase. “However, this will call for restructuring the loan, which may take time,” says Shetty.

Coping with the post-moratorium scenario

While the RBI has made it clear that the credit scores of borrowers who availed of the moratorium will not be affected, experts say borrowing could get more difficult for them in future. “Lenders could become cautious about lending to borrowers who availed of the moratorium,” says Mandal. If their credit score is less than 750, they should work actively on raising it, to improve their chances of getting a loan in the future. They should also work hard on convincing their lender, via a face-to-face meeting, that their finances are sound.

Those who have availed of other high cost loans as well, like credit card or personal loan, should repay them first and bring down their monthly burden.   

All borrowers who have availed of the moratorium should also check their credit report. “If there has been an error that has affected your score, say, if the moratorium has been mistakenly reported as a default, reach out to the lender and the bureau to get it corrected,” says Shetty.

Borrowers should also follow a case being heard in the Supreme Court where the judges have asked the government to clarify its stand on waiver of interest on loans during the moratorium. If there is a favourable outcome, they may not have to pay any interest at all on their loans for the moratorium period.      

Prepay to prevent extension of loan tenure
Loan of Rs. 50 lakh at 8.50% for 20 years
EMIs: 240		Total Interest:	Rs 5,413,879	EMI:	Rs 43,391
5-month Moratorium		Your Bounce-Back Plan
5 Deferred EMIs	Interest For Deferred EMIs (Rs)	Pre-Pay Your 5 Deferred EMIs (Rs 2,16,955)
		12 Months After Last Deferred EMIs
		With EMI #	New Tenure In Months	Total Interest (Rs)	Interest Saved (Rs)
1 to 5	1,76,514	18	243	55,31,614	9,50,756
13 to 17	1,72,939	30	243	55,21,974	8,45,339
61 to 65	1,58,285	78	242	54,90,717	5,16,870
121 to 125	1,22,620	138	242	54,64,082	2,51,369
181 to 185	75,973	198	241	5446,718	84,753
Compiled by BankBazaar.com for illustrative purposes only.