Opting for a loan rejig can impact your credit score

Getting your loan restructured may offer you some relief amid the pandemic-led financial stress, but it can impact your credit score.

“If the loan gets restructured and is reported so by the banks, for which the RBI has already issued guidelines, there will be a detrimental impact on the credit score. Repayment behaviour is one of the important factors that go into the credit score algorithm,” said Manu Sehgal, Business Development Leader, Emerging Markets, at credit bureau Equifax.

Credit bureaus have a field called ‘restructured due to natural calamities’ and banks are likely to report Covid-led restructuring under that, he added.

“But irrespective of why it has been restructured, the moment an account is not reported as standard any more, there would be an impact on the credit score.”

However, there will be no impact on the credit scores of those who opted for a loan moratorium, rather than a restructuring.

RBI circular

The RBI, in its August 6 circular on the resolution framework for Covid-related stress, had said the credit reporting by lending institutions in respect of borrowers shall reflect the ‘restructured’ status of the account if the resolution plan involves renegotiations that would be classified as restructuring under the Prudential Framework.

“The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured,” it had said.

Most credit bureaus that BusinessLine approached were tight lipped on the issue. “The data will be reported by the lenders and the algorithms have not changed. So, any restructuring will be a factor in a person’s credit score,” said an industry expert, noting that this, in turn, would make it tougher to get a loan in the future.

In an FAQ on the loan restructuring scheme, HDFC Bank says the loan or credit facility will be reported to the credit bureau as ‘restructured’.

“…as per regulatory guidelines, restructuring has to be reported at a borrower level to the credit bureaus and, hence, all the facilities or 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 has said.

When asked if the recast would impact credit scores, CS Setty, Managing Director (Retail and Digital Banking), SBI, told reporters recently he was not certain. “It is a very peculiar situation,” he said.

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