How RBI loan restructuring scheme will impact your finances

Experts say it is wise to repay any existing loans before making fresh investments, as the interest cost saved by repaying the loan is likely to be much higher than the return an investor can expect to generate from the markets.

The Supreme Court recently extended the loan moratorium period virtually till September 28, giving relief to borrowers. The SC also asked banks not to declare any loan as NPA accounts (non-performing assets) that are unable to make repayments.

While the Supreme Court has extended the moratorium till 28th September, the RBI did propose a loan restructuring scheme. However, industry experts say if it is implemented, the consequences will be in the form of the increased burden of interest payments.

The aim of offering loan restructuring is to provide relief to those borrowers who either lost their job or whose businesses have not revived or those who have suffered a huge loss in their business. Gaurav Chopra, Founder and CEO of IndiaLends, says, “The benefit of opting for a loan restructuring plan is that the borrower may be able to reduce the amount of his/her EMI or get a moratorium on the loan principal repayments with the hope that his/her financial situation improves.”

Having said that, there are multiple downsides to loan structuring. Chopra says, “The borrower will have to pay a higher cost, including additional interest and fees; duration of repaying the loan will also comparatively increase. Hence, it is a wise choice to not opt for a loan restructuring facility if the borrower has the ability to repay the EMIs on time.”

Additionally, experts say those who are not facing any liquidity crunch and have enough money, should not opt for loan restructuring and rather repay their loans as soon as possible.

Impact of loan restructuring on borrowers’ finances

In the short term, a borrower can lower his/her existing EMI payments by restructuring the loan. However, this comes at a cost.

1. Cost of restructuring a loan: Restructured loans usually have a processing fee (a percentage of the loan amount) and come at a higher interest rate than the current loan.
2. Compounded interest: Given that the restructured loan will have a higher repayment period and/or a payment holiday, note that the overall interest paid during the duration of the loan will increase.

What should you do?

A lot of people have started investing in stocks, mutual funds, etc. However, there are certain people who are also investing even though they have to repay their existing loans. Industry experts suggest borrowers should repay their loans or debts even if they have to liquidate their investments in stocks or mutual funds.

Chopra of IndiaLends says, “It is wise to repay any existing loans before making fresh investments, as the interest cost saved by repaying the loan is likely to be much higher than the return an investor can expect to generate from the markets.”

For instance, if you have a debt on your credit card and you are paying interest of 3.5 per cent a month (or 42 per cent a year), then in order to justify making fresh investments, you would need to earn a return of at least 42 per cent per annum – which is unrealistic. Experts say even if someone is able to do it for some time, it will not be sustainable.