Debt recast comes at a cost for borrowers

Retail borrowers looking to restructure outstanding loans will have to shell out more money, either in the form of a higher interest rate or as a lump sum processing fee, under a central bank-approved window.

Banks have put in place these charges to offset the effect of extra provisions they will need to make for each loan they restructure. The Reserve Bank of India (RBI) has directed banks to make 10% provisions on these loans, against 0.4% for standard loans.

Lenders who have so far released information related to debt restructuring indicated they will charge customers for availing of easier repayment norms. Other bankers Mint spoke to said they are uploading their guidelines and are likely to charge customers for debt recast.

According to a senior banker at a private sector lender, there is a cost associated with the whole process, and it needs to be passed on to borrowers. The bank, he said, is still deliberating whether to charge a one-time fee or increase the interest rate.

“However, most bankers are in favour of increasing the interest rate. Some banks are, in fact, looking to reprice the loan based on the current credit score of the customer,” he said. Reliance on changes in credit score to reprice loan agreements under debt recast could be problematic for borrowers as a lack of clarity during the moratorium period has led to some abrupt changes in these scores.

State-owned Canara Bank said on its website that it will levy a fee of 1,000-10,000 on its retail borrowers for restructuring loans. Meanwhile, private sector lender HDFC Bank said it may levy a fee if the borrower chooses to restructure the loan, without specifying the quantum or whether it is limited only to retail customers.

HDFC Bank said borrowers should have at least 25,000 of outstanding loan to opt for the debt recast.

State Bank of India (SBI), for instance, will charge retail borrowers additional interest of 35 basis points over their existing rate for debt recast. In responses to frequently asked questions on its website, the bank said this is meant to offset some of the additional provisioning cost.

To apply for easier repayment terms under the debt recast framework, retail borrowers will have to submit salary slips for the month of February and the latest salary slip; a declaration of estimated income after the moratorium period, and letter of discharge from a job, in case of loss of employment.

C.S. Setty, managing director, SBI, said most debt recast proposals may come from within the moratorium pool.

“So, (request for) this facility (recast) essentially will come from the moratorium pool. The first (objective) is to establish his/her job is lost and (the borrower) has got zero income. The second part is that if the borrower says he/she is not likely to get a job in 24 months then obviously I can’t offer the restructuring because, after 24 months, repayments will start.”

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