What is Loan Restructuring and Why RBI reopened One Time Loan Restructuring Scheme

Alan Joseph Alan Joseph
May 10, 2021 4 min read
What is Loan Restructuring and Why RBI reopened One Time Loan Restructuring Scheme

The Reserve Bank of India on 5 April 2021 had announced it has reopened the one-time loan restructuring programme for individual borrowers. Let’s look at what exactly is loan restructuring and the details of the loan restructuring programme reopened by RBI.

Loan Restructuring Programme
RBI Restructuring Programme
Types of Loans included in this restructuring programme
Eligibility
Bank Guidelines
FAQ

Loan Restructuring Programme

Loan restructuring is a feature that will allow the banks to change or modify the terms and conditions of the loan provided to an individual when they are facing a financial crisis. Banks do these in order to avoid classifying the loans as Non-performing assets and to avoid declaring the borrower as a defaulter.

If the customer will be classified as a defaulter, then the bank will have to keep aside the loan amount which will reduce the profits of the bank.

The restructuring programme may be done by the bank in different ways such as changing the interest rate, repayment period, extending the time, changing the installment amounts, etc.

RBI restructuring programme
RBI restructuring programme

RBI Restructuring Programme

The RBI had re-opened a one-time restructuring programme under which the bank will be able to let their borrowers to reschedule the payments they need to make or to extend the moratorium period to a maximum of two years.

This moratorium will not be like the last year’s blanket moratorium. The banks will have an option to choose or pick the borrowers who will be eligible to be part of the restructuring programme and based on the bank’s internal appraisal the period of the moratorium will vary.


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Types of Loans included in this restructuring programme

Some of the types of loans included in this restructuring programme would include credit card receivables, consumer durables, personal loans and auto loans. The banks also can include a resolution plans for loans such as educational loans, home loans and loans given for the investment in financial assets.

Eligibility

The eligibility criteria for the loan restructuring programme are that the loan account should be classified according to the standards which means that there shouldn’t be any default or pending payments on the installments as of 31 March 2021.

For the individuals who had opted for a loan restructuring programme under the scheme will be provided some relief as well. The RBI has given the freedom for the banks to modify the plans and the moratorium period by 2 years.


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Bank Guidelines

The banks will be allowed to reschedule the payments which can be through reducing EMI payment amount which will extend the time period. The banks have also been provided with an option where they can convert interest accrued or the interest which should be accrued into another credit facility.

According to the assessment of the borrower’s income streams the bank will be able to provide a moratorium for a certain period of time. The RBI had conveyed in a notification that there will be no permission provided for compromise settlements.

If the banks are planning to grant the moratorium then it would be for a maximum of 2 years and the moratorium will come into force immediately upon the resolution of the plan.

FAQ

What does RBI mean in banking?

The Reserve Bank of India (RBI) is the central bank of India.

Why is RBI called Bankers Bank?

In India, Reserve Bank Of India is known as the banker's bank because it acts as a bank for all the commercial banks in India.

Is RBI Public or private?

Reserve Bank is fully owned by the Government of India.

Conclusion

The economic activities in various parts of the countries have come to a stand still as there has been an implementation of the lockdown. Most of the individuals have lost their income streams where the others would have lost their jobs. This will make it harder to repay their loans and this initiative from RBI will reduce the losses of the banks and the financial stress of the individuals.

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