The news about the State Bank of India opening an online portal to facilitate the restructuring of its retail loans could provide relief to many borrowers who have been struggling to repay their loans due to cash-flow issues brought about by the Covid-19 pandemic. Soon, many other banks are expected to follow suit and come up with their own loan restructuring plans in accordance with the RBI guidelines.
However, the fact remains that opting for the restructuring of a home loan, education loan, automobile loan or a personal loan could have monumental financial implications which could further deteriorate the borrowers’ finances if such a decision is taken without putting ample thought. Here are a few critical things they would be well-advised to keep in mind before opting for a loan restructuring plan.
Get complete clarity about the applicable terms of the restructuring plan
Knowing whether you’re eligible for a loan restructuring plan, and if you do, how long can you defer your repayments at what additional cost could help you make informed decisions about critical things like your recalculated EMI amount, loan tenure and projected interest. To qualify for the moratorium, you must be able to conclusively show that your income has been impacted by the pandemic. According to the SBI, salaried employees would need to furnish salary slips or account statements indicating salary reduction or suspension, or job loss during the lockdown. Self-employed borrowers would need to furnish a declaration indicating closure or reduced business activity during the lockdown. Only accounts that existed in the bank’s books on March 1, 2020, will eligible for restructuring.
The SBI has also stated that this facility is only available on housing and other related loans, education loans, auto loans (other than loans for commercial use) and personal loans, and the last date to apply for the same is December 24, 2020. The loan also needs to be a standard loan and should not be in default for more than 30 days as on March 1, 2020. The SBI has stated that eligible borrowers may be offered a moratorium of up to a maximum of 24 months or rescheduling of instalments and extension of tenure by a period equivalent to the moratorium granted, subject to a maximum of 2 years.
Factor in the cost of restructuring your loan
It’s super-critical to understand that opting for the moratorium (now extended till September 28, 2020, by an interim order from the Supreme Court) and the restructuring plan does not mean a waiver on your repayment obligation as applicable interest charges will continue to get accrued during the EMI deferment tenure. The SBI has also stated that borrowers will be required to pay additional interest of 0.35% p.a. over and above their current pricing for the remaining tenure of the loan in order to offset partial cost of additional provisions required to be made by the bank. These interest charges would increase the total projected interest payout even if your EMI amount gets reduced in the long-term depending on your case. As such, borrowers must calculate how the restructuring plan would impact their loan burden and opt for it only if they have a robust repayment plan. They should ideally have a “bounce back” plan to quickly pay off the additional interest burden over and above their EMI obligations so that they can become debt-free within the desired timeframe.
Understand how it impacts your loan tenure
While factoring in the additional interest burden and the EMI amount, do not ignore how opting for restructuring could extend your loan tenure. If you’re towards the beginning of servicing a long-term loan like a home loan and now planning to restructure it, doing so could extend your loan tenure by years depending on your loan amount, tenure and repayments made till date. Now, such a proposition could be highly risky if you’re nearing the retirement age and the restructured loan tenure enters your post-retirement years when your income channels would be fewer. As such, always assess the feasibility of repaying a restructured loan during the extended tenure before finalising your decision.
In conclusion, while the loan restructuring plans could help people better manage their loan obligations in the short term amid the Covid-19 crisis, even the slightest careless mistake in understanding its ramifications could prove to be counterproductive. I would suggest existing borrowers should first try to timely clear their loan dues without the help of moratoriums or tenure extensions. They should see whether they could solve their short-term cash-flow issues through liquidation of investments or other means until their income channels get back on track. Only when they’re absolutely sure they’ve exhausted all the means to repay their loans should they consider taking the loan restructuring route. And even if they do opt for it, they should ensure they have the necessary repayment plan. Because loan restructuring is a great benefit during these difficult times, but borrowers need to ensure they can afford the cost of availing this benefit.
(The author is CEO, BankBazaar.com)