Your creditworthiness will not be affected if you choose to undergo credit restructuring. Here’s why

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Representative image | Photo: Dhiraj Singh | Bloomberg

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Mumbai: The credit restructuring facility provided by the Reserve Bank of India (RBI) will have no impact on the creditworthiness of individual borrowers.

According to banking industry officials, a customer’s creditworthiness is not affected by personal loans, such as home or auto loans, even if they choose to restructure their loans. Instead, creditworthiness and future creditworthiness are determined by the loan repayment history after the loan has been restructured.

When the credit moratorium expired in August, the RBI allowed banks and non-banking finance companies (NBFCs) to restructure loans from private and corporate borrowers without classifying the loan as NPL.

The supervisory authority allowed the banks to offer a repayment moratorium for up to two years as part of the restructuring. Credit restructuring essentially means extending the repayment cycle of an existing loan if the customer is having difficulty servicing the loan.

According to the latest regulation, a person or a company can only be considered for a debt rescheduling if they are financially affected by the Covid-19 pandemic and if the loan is due on 1.

The RBI had made it clear when announcing the credit moratorium in March that it would have no impact on creditworthiness, but there are now concerns among customers who fear that the decision to revise the credit could affect their creditworthiness.


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What the banks and experts say

Answering FAQs about the loan restructuring program, HDFC Bank, the country’s largest private lender, said that the loan or credit facility will be reported to the credit bureau as “restructured” once a customer calls on the debt restructuring.

“Please note that according to regulatory requirements, restructuring at borrower level must be reported to the credit bureaus and thus all facilities / loans of the borrower are classified and reported to the bank as” Restructured “, even if the borrower has made use of the restructuring for only one Credit, ”said the bank.

However, credit bureaus said the mere decision to recast the loan will not change the credit history.

“A customer’s credit history, or credit history, depends on how the customer will fare in terms of repayment after the debt restructuring,” said Ashish Singhal, executive director of Experian Credit Information Company, a leading credit information bureau.

“The important thing is how the customer behaves when the loan is restructured. It is not required that the customer who chose to revalue the credit have a lower credit score than someone who did not take advantage of the revaluation. The credit history is only affected if the loan is not serviced in a timely manner, ”he said.

Singhal explained that the goal of a credit score is to provide lenders with information about the customer’s loan repayment history, which will help the lender make a loan decision.

“The score represents the probability of default. The Experian score band is between 300 and 900, and lenders consider anything over 750 to be a good loanable score. There are lenders who also give loans with a score of 600 to 700, ”he said, adding that commercial banks usually prefer a higher score compared to NBFCs.

“Lenders also decide how much interest to charge a customer based on Experian’s creditworthiness. So a customer with a high score can borrow at a lower interest rate, ”he said.


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Who can apply for debt restructuring?

Some banks have already started offering credit restructuring programs to customers.

For example, the State Bank of India has stated that clients whose income or salary was reduced in August compared to February will be eligible for debt recast.

Customers who have lost their jobs or are about to close due to the pandemic can also take advantage of the debt rescheduling. The bank has categorically stated that the client is not eligible for restructuring if revenue is not affected.

Home loan, educational loan, car loan and personal loan borrowers can apply for a loan revision under the “Personal Loan” restructuring regime. SBI customers can request the loan rewrite by filling out a form on their website.

HDFC Bank also said that the customer must be financially affected by the pandemic in the form of reductions or losses in revenue or cash flows.

“The decrease in revenue and its financial impact on the customer will be verified by the bank on the basis of the documents / information presented showing the decrease in cash flow due to the effects of COVID-19. The bank will check the viability of the client to pay the restructured EMIs based on the documents presented before approving the restructuring, ”the bank said.

It added that in addition to the profitability calculations, the customer’s repayment balance and the customer’s reactions during the previous use of the moratorium also feed into the restructuring decision.

HDFC Bank and ICICI Bank still need to upload the online application form to their respective websites.


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