Loan Restructuring Will Affect Your Credit Score

To address the economic fallout triggered by COVID-19, the Reserve Bank of India (RBI) came up with a framework for banks and financial institutions to provide resolution plans to their customers facing financial stress. Accordingly, banks and NBFCs (non-banking financial institutions) have framed their policies for restructuring loans of individuals and entities that have been impacted by the pandemic.

There are some pre-conditions set by the banks to decide the eligibility of individuals and entities that can avail this facility. It will especially help those whose source of income has been impacted due to the pandemic.

However, opting for the restructuring will impact your credit score.

As per RBI's regulatory guidelines, your loan/credit facility will be reported to the credit bureau as "Restructured".

"Please note that as per regulatory guidelines, restructuring has to be reported at a borrower level to the credit bureaus and hence all the facilities/loans of the borrower with the bank will be classified and reported as "Restructured" even if the borrower has taken restructuring for only one loan," reads a statement on loan restructuring on HDFC Bank's website.

The statement does not clarify on if the credit score will be impacted, however, an RBI circular indicates that the decision will rest in the hands of the credit information companies.

"The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured," said RBI's 6 August circular on the resolution framework for COVID-related stress.

Experts suggest that credit information agencies have a field for restructuring due to natural calamity, where the COVID-19 induced financial stress may fall.

If we look at the type of accounts that are allowed to avail restructuring, HDFC Bank's FAQs say that "Individuals and Entities that are classified as Standard, but not in default for more than 30 days with the bank as on March 1, 2020 and continue to remain as standard across all its loans/facilities till date are eligible for restructuring."

Reclassifying an account from 'standard' to 'restructured' could hurt one's credit score.

In a Business Line report, a Business Development Leader at Equifax was quoted saying that "irrespective of why it has been restructured, the moment an account is not reported as standard any more, there would be an impact on the credit score."

If you are compelled to restructure, the credit score will start improving if you are paying your EMIs on time, assuring that the financial stress was temporary. There could also be consideration given if you have a clean repaying record pre-COVID.

An impact on your credit score will make future loan sanctions difficult. Further, with banks and financial institutions facing uncertainty on their NPA (non-performing assets) levels, they would definitely avoid customers with a weaker repaying history, at least for unsecured loans.