How banks will restructure your home and auto loans

Banks are using the KV Kamath Committee’s “Leverage” and “Liquidity” guiding principles to develop board-approved policies for a two-year restructuring of retail loans, particularly home loans and automobiles.

The Reserve Bank of India had previously given banks freedom to decide on rules for restructuring retail loans, while a high-level KV Kamath committee was formed to suggest parameters for corporate restructuring.

The KV Kamath committee had already submitted its report, which the RBI accepted.

Finance Minister Nirmala Sitharaman has asked banks to roll out the loan restructuring program by September 15, with the six-month moratorium on loans having already ended in August. The end of the moratorium is expected to cause difficulties for borrowers, as banks will start charging for new EMIs from September 1. The credit bureaus will also score accordingly, as any defaults will reflect in the borrowers credit score.

A lower credit rating closes the door to further financing through a personal loan or credit card.

According to the bankers, the parameters of loan restructuring for retail borrowers will be the extent of leverage which will include all kinds of existing loans, from home loans, car loans to credit card loans. Liquidity position is yet another parameter to assess the current cash position as there have been salary cuts, unpaid leave and job losses. Similarly, the bank will also analyze the debt service capacity by looking at the deposits or current, savings or fixed income of the spouse.

Personal loan borrowers, who have taken a six-month moratorium, can opt for loan restructuring. But, only those who have a standard account and have not been in default for more than 30 days as of March 01, 2020 will be eligible.

Currently, outstanding retail loans are in the region of Rs 25 lakh crore. The bulk of personal loans are mortgages or home loans, which constitute around Rs 13 lakh crore. Personal loans are also large with an outstanding amount of around Rs 7 lakh crore. The outstanding auto loan is around Rs 2 lakh crore.

The restructuring will also benefit banks as they will be exempted from classifying the loan as NPA, which attracts provisioning and also eats away at capital.

Under the proposed loan restructuring, the options are to extend the term of the loan for an additional two years or to provide for a moratorium on interest and principal or a combination of both – extension of the loan term and moratorium. The banks are also in the process of establishing the rules for the treatment of loans (as NPAs) in the event that loan restructuring fails during the implementation period.

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