Credit history only after debt recast would be taken into account for new loans. Banks will allow recast only if income impacted between February and August.
The loan restructuring facility the Reserve Bank of India (RBI) has allowed will leave no impact on the credit score of retail borrowers.
According to officials in the banking industry, the credit score of a customer of any retail loan, like home or auto loans, will not be impacted even if they decide to restructure their loans. Instead, the credit score and future borrowing eligibility will be decided by the credit repayment history after the loan has been restructured.
As the loan moratorium came to an end in August, the RBI allowed banks and non-banking finance companies (NBFCs) to restructure loans of retail as well as corporate borrowers without classifying the loan as non-performing.
The regulator allowed banks to offer a repayment moratorium, for up to two years, as a part of the restructuring exercise. Loan restructuring essentially means extending the repayment cycle of an existing loan if the customer is facing difficulty in servicing the loan.
In the latest scheme, an individual or a business will only be eligible for debt recast if impacted financially by the Covid-19 pandemic, and provided the loan was standard and not in default for more than 30 days as on 1 March.
The RBI had specifically clarified while announcing the loan moratorium scheme in March that it will have no impact on credit score, but there is now apprehension among customers who are worried that opting for a loan recast may impact their credit score.
What the banks and experts say
Answering frequently asked questions (FAQ) on the loan restructuring scheme, HDFC Bank, the country’s largest private sector lender, said the loan or the credit facility will be reported to the credit bureau as ‘Restructured’ once a customer avails the debt recast.
“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,” the bank said.
However, credit bureau agencies said merely opting for loan recast will not alter credit history.
“The credit history, hence the credit score of the customer depends on how the customer will perform in terms of repayment post the debt restructuring,” said Ashish Singhal, managing director, Experian Credit Information Company, a leading credit information bureau.
“What is important is how the customer behaves on the restructured loan. It is not necessary that the customer who has opted for a loan recast will have a lower credit score than someone who has not availed the debt recast. The credit history will only be impacted if the loan is not serviced on time,” he said.
Singhal explained that the objective of a credit score is to be able to tell the lenders about the credit repayment behaviour of the customer which helps the lender to make a credit decision.
“Score represents the probability of defaulting on a payment. The Experian score band is between 300 and 900 and lenders consider anything above 750 as a good, lendable score. There are lenders who also lend on a score of 600… 700,” he said, adding that commercial banks typically prefer a higher score as compared to NBFCs.
“Lenders also decide based on Experian credit score on how much rate of interest can be charged to a customer. So, a customer with a high score can borrow at a lower rate,” he said.
Who can apply for debt recast?
Some of the banks have already started offering the loan restructuring schemes to the customers.
State Bank of India, for example, has said customers whose income or salary in August reduced as compared to what it was in February will be eligible for the debt recast.
Customers who have lost their jobs or faced closure of business due to the pandemic can also avail the debt restructuring scheme. The bank has categorically said the customer will not be eligible for restructuring if income has not been impacted.
Home loan, education loan, car loan and personal loan borrowers are eligible to apply for loan recast under the ‘personal loan’ restructuring scheme. SBI customers can apply for the loan recast by filling up a form on their website.
HDFC Bank also said the customer has to be impacted financially by the pandemic in the form of reduction or loss of income or cash flows.
“The reduction of income and its financial impact on the customer will be reviewed by the bank on the basis the documents / information provided which does show the drop in cash flow due to the COVID-19 impact. The bank will assess the viability of the customer to pay the restructured EMIs basis the documents provided, before granting the restructuring,” the bank said.
It added that apart from the viability calculations, the repayment track record of the customer, and the responses given by the customer while availing moratorium earlier will also be factored in the restructuring decision.
HDFC Bank and ICICI Bank are yet to upload the online application form on their respective websites.