How Loan Restructuring Impacts Your CIBIL Score

RBI’s loan restructuring scheme can help lower your EMI burdens when faced with a financial crisis. This can be of major help if you have been unable to repay your dues because of a sudden inability to work, job loss, etc. However, the question is: How does debt restructuring affect your CIBIL Score? Let's understand this in detail.

A restructured loan in the CIBIL report is denoted as ‘restructured’. This may negatively impact your future chances of getting a new loan or credit card. Let's say you applied for just one loan to be restructured. In this case, the lender may report all your loans as 'restructured'. Information about your restructured loans is usually reported under the 'written off' section. Thus, leading to a small drop in your CIBIL Score.

So how does this affect you? Lenders usually assess your CIBIL Score before processing a loan application. Thus, credit scores have a key role to play when it comes to future borrowing opportunities. When accessing your credit report, lenders may also consider the 'written off' status as wilful dissolving. This can make it difficult for you to get a loan in the future. Still, a loan restructuring helps you avoid defaulting, saving you from a major drop in your score. But how to restructure a loan?  

RBI’s loan restructuring helps you repay as per your changed repayment capability. This can mean rescheduled EMI payments, lower interest rates, or a moratorium period. Restructuring can also lead to the conversion of your loan’s interest into another loan. Loan restructuring was first introduced to mitigate losses faced by MSMEs and individuals due to the corona pandemic. It was further extended in August 2020. 

RBI has offered discretion to lenders under the Loan Restructuring Framework 2.0. As per recent guidelines, they can decide on the moratorium period. They can also change the repayment schedules of the principal. Lenders can also hike the interest charged for restructured loans. They may also charge an additional processing fee.

Here are some requirements you are required to fulfil to get your loan restructured:

• Entities who are unable to repay on account of the fallout of COVID-19

• Those who have not had their loans restructured under the facilities previously

• The amount borrowed from financial institutions does not exceed ₹25 Crores in total

• Those who have utilised the facility and received a moratorium of less than 2 years can get an extension of another 2 years

• Loan accounts that have been tagged ‘Standard’ as of March 2021

If you have taken a loan from any of the following entities, you can get it restructured:

• Scheduled commercial banks (except regional rural banks)

• All India term financial institutions like NABARD, NHB, EXIM Bank, and SIDBI

• Small finance banks

• Systemically important non-deposit taking non-banking financial companies (NBFC-ND-SI)

• Deposit taking non-banking financial companies (NBFC-D)

Thus, reach out to your lender and discuss your eligibility prior to making any decision. 

Here are some tips and tricks to ensure that the loan restructuring process is smooth:

Check the Associated Costs

Restructuring your loan offers short-term relief, but can also increase your repayment costs. If the bank increases the interest rates, the total cost of your loan also rises. Furthermore, in case of a moratorium, the interest that is not paid adds up. This pushes up the outstanding amount of principal. You may also be asked to pay an extra charge as a processing fee to get your loan restructured.

Consider Other Alternatives

Try alternatives like a loan balance transfer or debt consolidation. You can also try finding other income sources or manage your expenses better. But, if your cash flows are impaired and you have no other alternative, restructuring may help. 

Track your CIBIL score

Take a look at your CIBIL report and explore ways to boost your CIBIL score. A loan restructuring may lead to a fall in your credit score. However, your score may pick up once you start repaying your EMIs in a timely manner after the moratorium. Try lowering your credit utilisation ratio and pay your credit card bills on time. This helps you avoid any adverse impact on your score. Proper monitoring and building of your score ensures that you can get new credit easily in the future.