Covid-19 second wave: Should you avail of RBI's relief on loan repayment?

If you opt for restructuring, your interest cost will rise and there could be other charges

With the second wave of the pandemic hitting the country hard, the Reserve Bank of India (RBI) on Wednesday again announced relief measures for retail borrowers.
 
These will apply both to those who have not availed of any relief in the past and those who have.
 
If you are an individual borrower who did not avail of the restructuring facility under resolution framework (RF) 1.0 announced in August 2020 and available till December 2020, you can now get your loan restructured till September 30, 2021. However, you will have to fulfil a couple of conditions. “The loan account needs to be classified as ‘standard’ on March 31, 2021 and outstanding dues should be up to Rs 25 crore,” says Naveen Kukreja, chief executive officer (CEO) and co-founder, Paisabazaar.com.

 

If availing relief a second time Borrowers who have availed of relief in the past can do so again. If under RF 1.0, their moratorium was for less than two years, or if the residual tenure was extended for less than two years, then the moratorium period can be increased, and/or the residual tenure can be extended up to two years.
 
Suppose you had opted for a 10-month moratorium. At the end of this period, your loan was restructured and your tenure rose by six months. In other words, you have already availed of relief for 16 months. “It means your moratorium period, the extended tenure, or a combination of the two, can be increased by another eight months in this case,” said Adhil Shetty, CEO, BankBazaar.com.

 
What is a resolution framework?
 
Under RF 1.0, any individual whose payments were not overdue by more than 30 days on March 1, 2020, could request for loan restructuring. This could take the form of a moratorium, rescheduling, or conversion of the loan into another credit facility.
 
Moratorium means the borrower does not pay any EMI. His unpaid dues get added to his principal, which grows bigger. When he starts paying his EMI again, his tenure (in some cases even the EMI) increases. Rescheduling means the customer gets his EMI reduced and his tenure increased. 
 
The third option was that the loan could be converted into another loan, say, part of the home loan could be converted into a personal loan. The details of RF 2.0 have not been announced yet.

 
What should you do?
 
Examine your cash flows and then decide whether to avail of this relief programme. “It will take around six-nine months for a significant portion of the urban population to get vaccinated. People’s income disruption could last for that long. Seek relief for a similar duration,” says Aditya Mishra, founder and CEO, SwitchMe, a digital home loan broker.
 
This relief will come at a cost. “If your cash flows have been hit, and you have no other recourse, then avail of this scheme rather than default. But remember your total interest cost on the loan will rise,” says Deepesh Raghaw, founder, PersonalFinance­Plan, a Securities and Exchange Board of India-registered investment advisor. Do not confuse a resolution framework with the March-August 2020 moratorium on which the Supreme Court waived the interest on interest.

 
Finally, in some cases, the lender could convert a part of your home loan into a personal loan. “This will entail paying a higher rate of int­e­rest, which you should try to resist,” says Mishra.

RESTRUCTURING COST

• Your bank could charge a one-time fee for loan restructuring
• Interest rate on the restructured loan could be hiked
• Your credit score will take a knock if you opt for restructuring
• A part of your home loan could be converted into a personal loan, which carries a higher rate of interest