Get ready for 'restructured' tag in credit report for loan reset

The retail borrowers of home, education, auto and personal loans seeking loan restructuring under the COVID relief package will get the 'restructured' tag in their credit report till the maturity of the loan.

The banks regularly share the customer loan data with the credit bureaus, which in turn provide a score. This credit score is used by the lenders - bank, NBFCs, fintech companies, etc - to assess the credit worthiness of a borrower, including instances of defaults.

The restructured account tag would provide one more source of information to lenders before taking a credit decision.

The major credit bureaus in India are CIBIL, Experian, Equifax and CRIF High Mark.

This negative tag would come in the way of taking other loans from banks and NBFCS. In fact, the banks would be a bit skeptical in lending to such customers, or will ask for additional collateral, or provide a reduced limit.

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Private sector lender HDFC Bank has specifically said that as per the regulatory guidelines, the bank will report loan and credit facility to the credit bureau as "Restructured".

"The loan restructuring has to be reported at a borrower level to the credit bureaus and hence all the facilities and 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," states the largest private bank.

Currently, the total retail loans in the banking system are in excess of Rs 25 lakh crore. As per available data, the individual or retail loan under moratorium till August this year were 50 per cent in volume and 55 per cent in value term.

While the loan moratorium was available for all customers without any documentary proof of reduced income or salary post the COVID-19 outbreak, the loan restructuring is very selective. It is not available to all as the borrower has to prove that his income has been impacted because of COVID-19. Take for example, the State Bank of India (SBI) has put out a set of conditions like reduced salary or income of a borrower in August 2020 as compared to February 2020, reduction or suspension in salary during lockdown period, job loss or closure of business, and closure during lockdown or reduced activity of units, shops or business establishments in case of self-employed professionals or businessmen.

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Back of the envelope calculation shows that retail loans under moratorium till August were around Rs 14 lakh crore. The restructuring benefit, say for 50 per cent of them, means Rs 7 lakh crore loans would get restructured in the next three months.

There is also a disincentive for borrowers who are opting for loan restructuring. The banks are asking for processing fee or additional interest rates.

Take for example, HDFC Bank has said that the bank may levy a fee for loan restructuring. Similarly, the SBI, which was first off the block to announce the restructuring for individual borrowers, had said that the bank will charge additional interest of 35 basis points over and above the current pricing for the remaining tenure of the loan.

The largest bank in the country reasoned that it is charging this additional amount in order to offset partial cost of additional provisions required to be made by the bank. After SBI's additional interest announcement for restructured accounts, many other public sector banks are also considering it.

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