In the world of credit finance, loan restructuring is seen as an intimidating and scary concept. It implies a certain financial turmoil, and there is always the question of whether it will impact your CIBIL score and if it does- the impact is negative or positive. Well to answer this question, we first have to understand the two main components of this equation. It is important for borrowers to know what it means, understand the underlying concept, and be aware and informed about the choices, options and factors affecting their CIBIL score.

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What is Loan Restructuring?

To understand the implications of loan restructuring on your CIBIL score, you first need to understand the meaning of loan restructuring and what it entails.

As the phrase spells out, loan restructuring is the process which involves the revision of a loan, which can happen due to various unforeseen reasons. When it comes to the Indian economy, loan repayment is generally considered a way of tackling the financial distress caused by many factors like lack of payback funds, medical emergencies, unfortunate personal circumstances, economic downfall or other such financial crises. A loan repayment restructuring can involve certain changes in the loan agreement that will help the borrower manage their financial obligations more effectively-

1. Loan Tenure Extension- As the title suggests, the repayment period is adjusted and allows an extension. This allows the loanee a certain period of extension in which they can try and manage to repay their remaining amount and clear the loan.

2. Interest Rate adjustment- The second option is that the lenders might consider reducing the rate of interest on the loan, which can significantly reduce the burden on the loanee.

3. Partially forgiving the loan- As the name suggests, the lender may agree to forgive a portion of the loan amount. This is considered to be an option only for extreme cases and is usually arrived at after negotiations by the parties involved.

4. Rescheduling the repayment routine- In this case, the lenders may consider rescheduling the terms of the repayment routine, allowing the borrower the flexibility to attempt to repay the amount as and when they can manage their finances.

5. Principal Moratorium- In this process, borrowers can skip a few repayment instalments of the principal amount, and they can focus on paying the interest first.

Loan Restructuring is generally a temporary solution that cannot be thought of as a permanent fix to any financial distress. The recommendation of the lender can do it or can be requested by the borrower. In some special cases like the pandemic, the RBI had also intervened and laid out some general rules regarding the loan restructuring that was to be implemented across all banks in India to help Indians have some financial respite during the pandemic.

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CIBIL Score

A CIBIL score is essentially another name for your credit score. The specific name comes from the bureau that generates this score- Credit Bureau India Limited (CIBIL). The score is a three-digit scorecard calculated on an individual's various financial markers like credit utilization, loan history, types of credit etc. Since a loan is an essential component of generating a credit score, it is important to understand the implications of how it would affect your CIBIL score.

Loan Restructuring Impact on your CIBIL Score

While it offers a certain freedom to tailor the loan repayment schedule as per your needs, a loan restructuring should not be viewed as an option that gets you out of your loan repayment forever. As a borrower, it is important for you to understand the factors, the implications and the impact that they may have on your financial portfolio. Let us take a look into how loan restructuring can influence your CIBIL score-

1. When any type of loan restructuring happens, the borrower’s loan account will be categorized as a Special Mention Account, which will, in turn, be reflected in the reporting system. This special label will mean that the borrower's profile will be seen as being in some financial distress since a loan restructuring can only be induced during times of financial distress. The lenders then use the categorization to supervise these labelled accounts. This typically shows that the payments are overdue but have not yet been classified as a non-performing asset. Normally, such loans are divided into three types- SMA-0- which is for loans that have an overdue of less than 30 days SMA-1, which is for loans that are overdue for more than 30 but less than 60; and then SMA-2, which is for loans which have overdue payments of 60 days to 90 days.

It is to be understood that loan accounts that have opted for loan restructuring have a chance of being negatively impacted on your CIBIL score. Although there are no fixed parameters for measuring the scores, they vary depending on factors like previous credit history and the overall situation of their credit portfolio.

2. Another important aspect of loan restructuring is the possibility of a change in the tenure of your repayment. This would mean that your loan repayment period will be extended to adjust the reduced instalment because a lower amount of instalment equals a longer repayment period. Over time, this can help positively impact your CIBIL score as it can help you build a long-standing credit history. But it is to be noted that this positive impact can only be brought about if your payments are on time post-restructuring and there are no defaults. However, this very factor can also have a negative impact where the lowered instalment amount can be seen as a struggle by the lender and an indication of probable financial instability.

3. A moratorium is generally a period where the borrower is provided temporary relief on the loan repayment. This can result in an immediate lowering of your credit score. This impact can have serious implications when lenders consider history and find data on serious defaults and late payments. However, post the moratorium period, the borrower can make amends by strictly following the repayment schedule and not leaving room for error.

4. Restructured loans are generally considered to cause less damage than settled loans. When it comes to the debate about settled loans vs restructured loans- the former is known to have a much higher negative impact on your credit score. Restructured loans indicate that the borrower has full intent of repaying their loan amount through a revised plan of action that may involve lesser interest rates, longer tenure or other factors that the lender decides upon. It does not compare to a settled loan, which can signify that a loan has been closed off for less than the full amount, while a restructured loan means the borrower will attempt to pay it back in full over an extended period of time.

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Things to remember about loan restructuring and its impact on CIBIL score

1. The negative impact of a loan restructuring is not permanent and can be reversed with better credit management. This is important to understand and acknowledge as the information itself can be overwhelming for most borrowers and may cause you to make rash decisions. So, it is always good to be better informed to avoid any additional duress.

2. It can be a way to build your creditworthiness over time as it can provide an opportunity to assess your financials and re-evaluate your situation. This opportunity can be realized by prioritizing your financial responsibilities.

3. It is considered to be less damaging than foreclosing a loan, so its impact, albeit negative, is not irreversible. Loan restructuring is not to be considered to be the end of your credit portfolio. It can be taken as a wake-up call that allows you some time to manage your loan and then provides you with some relief while also allowing you to repay the loan in more favourable terms.

4. A loan restructuring is a way to minimize damage, and its impact on your CIBIL score, no matter how big or small, can always be reversed with time. Having a loan restructuring rather than being labelled a defaulter is essentially better. Lenders will always see loan restructuring as a legal and acceptable way of adjusting a loan amount that a borrower finds difficulty in paying back. It will always be the more trustworthy and ethical way of managing your loan in case of distress or emergency.

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How can you bring up your score after loan restructuring

No one wants a low CIBIL score to be reflected on their credit profile. Since loan restructuring can impact your CIBIL score, here are some tips that can help you bring up your score after it has dropped.

1. Timely payment- A punctual repayment schedule is very important when it comes to maintaining a positive credit score. Especially after a restructure, where you have already

2. Diversifying Credit- Once you have your payments in order, you can diversify your credit by responsibly using diverse credits like personal loans, credit cards, home loans, etc.

3. Update the system- Update when your restructuring period is over and make sure that it reflects on your credit report. Regularly monitoring your credit condition can be a good way to maintain a good report since it helps you be on track and aware of your long-term and short-term goals.

It is also a good idea to stop borrowing further so as to minimize your financial burden. The focus should be on the repayment and closing of the loan rather than increasing your financial turmoil by taking up an additional loan.

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Conclusion

A loan restructuring will mean that your credit report or your CIBIL score, in this case, will see a temporary low rating. It implies that you have not been able to keep up with the original terms of the loan repayment as dictated by the lender and as accepted by you at the time of the approval of the loan. A loan structuring can be a cause for concern since it signals financial distress and an inability to stand up to your financial responsibilities. However, it is also a respite that can help you re-calibrate your money and prioritize your credit repayment. It can provide you with a temporary barrier to minimize damage to your credit profile by allowing you a period of time that can help you assess your long-term and short-term financial goals. A loan restructuring does have serious implications, but the good news is that it can always be turned around, and the impact is not permanent.

FAQs

Does loan restructuring impact your CIBIL score?

Yes, loan restructuring can affect your CIBIL score and negatively impact your credit profile.

Does loan restructuring reflect on your credit details?

Yes, loan restructuring is an important aspect of your loan or credit history and will be reflected in your credit details.

Is it beneficial to get a loan restructuring?

Loan restructuring can benefit the borrower as it can help them sail over financial distress and manage their borrowings, but it can also negatively impact your credit score.

Is it possible to remove the details of a loan restructure from your credit report?

Yes, removing the details of a loan restructure from your credit report is possible – you must first make sure that the dues are cleared and that your lender is updated on the recent condition of your repayment status. It is intimated to the credit bureau as well.

What will happen to my CIBIL score if I restructure my loan?

Your CIBIL score may have some negative impacts if you plan to restructure your loan.