Following the last year’s comfort calculations, the Reserve Bank of India (RBI), last month, notified a Loan Restructure Framework (RF) for this year. Some auxiliary privileges were announced by RBI in the latest policy review in the first week of the current month. Apart from some other monetary policy decisions, the major takeaway for small businesses and consumers is the revised policy of loan restructuring. As the name suggests, a beneficiary can avail of a relaxed repayment roster in the existing loans through the latest framework. The important question, however, arises whether one should opt for this scheme or not? Is this worth taking? In this write-up, let’s try to explore the answers.
What are the major highlights of the Restructuring Framework (RF) 2021?
According to RF 2, introduced in May 2021, a Covid entailed borrower may opt for relaxation concerning his immediate repayments. Banks are going to extend a moratorium duration of not more than two years towards repayment. In common parlance, a moratorium or holiday era refers to a period throughout which no reimbursements are asked from the borrower. For example, if you are enjoying a home loan from a bank and you are unable to pay due to a crippled income stream during Covid, you can avail of this procedure and you do not have to pay your monthly instalments for two years. Once the income stabilises, you will restart your repayment. This is the logic behind the technique. This time, unlike last year, stringent time norms have been set by RBI for the banks. Banks have been strictly instructed to follow these norms and make customers aware of the latest restructuring framework.
Who is eligible to avail of benefits under RF 2?
The framework is open for all retail borrowers and Micro, Small and Medium Enterprises (MSMEs). It means that any individual like you and any small businessman can avail of the framework relief. Any MSME loan, upto Rs 50 crores, is eligible under the revised protocols. As per the last month’s RF policy, this ceiling was Rs 25 crores. However, only those borrowers, whose loan account was standard as of March 31, 2021, are eligible. Now, what is a standard account? It’s often confused with an overdue account. A standard account is any loan that is not a Non-performing Asset (NPA). An NPA, on the other hand, is a loan in which there have been overdues for the last 90 days. On the 91st day of the overdue, the account is classified as an NPA or a bad debt. If an account was not an NPA on March 31, 2021, it is eligible for RF 2. Any borrower, who has already borrowed the benefit of restructuring of loan is also eligible. The only condition, however, is that the combined benefit should not be more than two years.
Should you avail of RF 2?
The restructuring of a loan account extends the repayment tenure. It keeps your loan going on for more than the anticipated time. The debt lingers on. Eventually, you bear the weight for a longer time and, in some cases, you will end up paying more interest for that extended period. Likewise, a restructure of an account, just like any other repayment behaviour of an individual or a firm, gets recorded in the repayment narrative. It reflects in the credit investigation reports like CIBIL and CRIF, whenever derived. Credit history reports are studied by banks at the time of taking a credit decision. Although, a restructure doesn’t mean default and it doesn’t affect the credit decision, yet an inimical image of the applicant is acquired. It means that there has been a liquidity crunch during bad times. It gives a clue that the financial health of the individual or a firm was not strong enough to bear any sudden brunt. Therefore, unless and until no other option is left, do not avail of the offer. If you are too much stressed due to covid and by no means you can repay, then only you should go for this scheme.
Postscript: If you are a borrower of a loan and are confused, take cues from this discussion. Analyse your financial position. Evaluate your income stream and make an informed guess concerning your income in future. If you feel that an income crunch is taking a heavy toll, there is no harm in availing of the benefits of restructuring. On the other hand, if you have a constant income stream that is unaffected by Covid, it’s better to stick to your existing repayment schedule only. I would go on to suggest that those with an adequate and constant income flow should pay off their debts as early as possible. Do not wait for the schedule in place. Pay in advance. Get rid of your debts as quickly as possible. It is very beneficial in the long run. It allows you to pay less.
(The author is MBA, NET, IBPS. He works as Manager Scale-II in the middle management of a reputed PSU bank. The views are personal.)