In August, the Reserve Bank of India directed banks to offer borrowers a one-time loan restructuring scheme. The scheme is aimed at alleviating the stress of borrowers unable to repay their loans because of loss of income and business during the lockdown. The restructuring would extend the loan tenure up to two years. This would make the repayment easier in some ways, tougher in others. A handful of banks have already announced their restructuring schemes and the others will follow soon. Let’s look at what stressed borrowers need to do with respect to their home, car, personal or education loans.

Check your eligibility

Only eligible borrowers can avail the restructuring. For example, State Bank of India in its resolution framework says the borrower must have a demonstratable reduction or loss of income in these last few months.

The RBI has directed that the scheme be provided only to those borrowers who had been repaying their dues on time till February 2020. Those who’d already stopped repayments 30 days prior to March 1, 2020, may not be able to avail the scheme because it focuses specifically on Covid-impacted borrowers.

Therefore, before you apply for the scheme, check with your lender about your eligibility. If your lender hasn’t yet announced the framework, wait for it. Do note that applying for the scheme doesn’t guarantee acceptance. For example, ICICI states that the application is merely “the beginning of the whole process. Once the borrower applies for restructuring of credit facility, the bank will review the application on the basis of its internal policies”.

Keep documents in order

As you need to demonstrate a loss of income compared with the February levels, you’ll need proof of income. For the salaried, the proof will be salary slips and bank statements.

For the self-employed, bank statements, GST returns, income tax returns etc may suffice. If there’s been a job loss, a letter stating termination of employment may be needed. The norms vary from one bank to another. Therefore, know which documents your lender will require.

Know the costs

The restructuring will not come cheap. SBI, for example, will charge you 35 basis points over and above the current rate of interest on the loan being restructured.

HDFC states that a processing fee may be levied. ICICI states that additional interest will be charged for the restructured loan. Apart from the charges, you may need to pay a higher EMI. Overall, your interest will increase especially if you’d also availed the moratorium on EMIs from March. Use an EMI calculator to ascertain long-term costs.

Don’t take if you can pay

Let’s be very clear that the restructuring framework has been designed keeping in mind the needs of borrowers stressed by Covid. If you have a stable income as well as the ability to keep paying your EMIs, do not take this option. You have nothing to gain.

A 24-month extension, including an additional moratorium, will not just add to your borrowing costs because of an increased interest rate and applicable processing fees, but it will also result in higher EMIs to make up for the time lost in any moratorium you have availed. This may further strain your already stressed finances. As the scheme also needs you to establish a loss of income, you cannot avail it if you’re expecting your income to fall in the future. It needs to have already happened.

Prepay to save costs

If you do avail the scheme, you’ll be incurring higher interest. The only way to cut down the interest is by pre-paying regularly on your dues. Pre-payments, which directly cut your loan balance, will reduce your loan tenure as well as the applicable interest.

In the illustration shown above, on a loan of Rs 50 lakh for 20 years at 8.50 per cent, your total interest is Rs 54.13 lakh. Assuming a moratorium from month 13 to 42 (a six-month moratorium followed by another 24-month moratorium — the maximum you can avail in the restructuring), your loan balance will increase to over Rs 60 lakh, but it still needs to be repaid in the remaining tenure of 222 months. This means your EMI will increase to Rs 53,357 from Rs 43,391.

To hack the interest back to the Rs 54-lakh range, you can prepay 2.5 times your EMI with every 12th EMI for four years. Assuming your income continues to improve, sustained pre-payment in this or any other manner will accelerate you out of debt.

Lastly, each bank has announced a date before which you need to apply for the restructuring. SBI says it’s December 24, 2020. For ICICI, it is December 18, 2020. Keep in touch with your lender to remain on top of the process.

The writer is CEO, BankBazaar.com