We advise against loan restructuring if customers can afford to pay: Federal Bank

The six-month loan moratorium given by the Reserve Bank of India (RBI) ended on August 31, 2020. Since September, banks have offered to restructure loans for eligible borrowers by following RBI guidelines. In an interaction with Hiral Thanawala of Moneycontrol, Shalini Warrier, Executive Director and Retail Head at Federal Bank discusses the long-term impact of this loan restructuring. She shares information on how new borrowers are evaluated during the COVID-19 pandemic and also discusses the steps the bank takes against borrowers who pledge gold when gold prices decline.

As the loan moratorium period ended in August, have you put in place a restructuring plan for retail borrowers?

From September, our bank started the regular collection of equated monthly instalment (EMI). We are extending loan restructuring to borrowers as per the Reserve Bank of India (RBI) guidelines on a need basis. This will reduce their EMIs and increase the loan tenure. Our branches are also educating customers regarding the long-term impact of this loan restructuring.

We are advising borrowers to opt for loan restructuring only if they really need to. If they can manage the cash flow, our advice would be to not opt for loan restructuring, given that there would be an impact on their interest costs and their credit score.

Will there be additional charges for customers opting for the restructuring plan?

Yes, there will be some additional charges as banks are doing a lot of documentation work for customers approaching them for loan restructuring. From an interest rate perspective, there could be changes, and that will be discussed and arrived at with customers on a case-to-case basis.

What has been the trend in demand for fresh loans from retail borrowers over the past three months?

We have seen an increase in demand for gold loans. As per the first quarter’s results (April to June 2020), gold loans have grown 36 per cent year-on-year and 10 per cent quarter-on-quarter for the bank. In car loans, we are seeing a marginal pick-up; primarily, there is a demand for car loans at the entry level, i.e., for smaller cars. Home loans will probably take a few months to come back. Customers will apply for home loans when they are confident that their future income is secure.

Are students pursuing online education in this pandemic eligible for education loans?

The concept of online education is a relatively new area for banks. We still have to wait and watch to see its benefits. Our first preference will be to support regular courses in campuses. Having interactions with our customers and their wards, we understand that most of these online courses are temporary measures; by next year, everybody will get back to their campuses.

At present, we are taking a case-to-case position, looking at the situation and reputation of the education institution. We understand from the institution whether it intends to go back to campus courses by next year and what the criteria are for starting campus education.

How have you been evaluating new borrowers in these challenging times?

We are focusing on future cash flows of new borrowers (salaried and self-employed) in our evaluation parameters. Then, we look at the industry, analyse the future prospects of that industry in the COVID and post-COVID environment. So, the industry overlay has been an important factor that we have considered in these challenging times.

Gold loans have become attractive because of a higher loan-to-value (LTV) on offer. What are the key mistakes borrowers need to avoid while applying for a gold loan?

There are regulated and non-regulated entities in the market offering gold loans. We are advising borrowers to avoid approaching any of the non-regulated entities because the rate of interest can be exorbitant. One of the other mistakes borrowers make is they only look at the lowest interest rate for gold loans. However, interest rate is not the only factor to be considered. There are multiple hidden charges. For instance, there could be safe deposit charges to keep your pledged gold in the bank’s locker.

Some entities give you short-tenure gold loans. But, borrowers do not understand that on a short-tenure gold loan with low interest rate, if you don’t repay for some reason, then penal interest goes up. So, it’s important you take a tenure that matches with your needs and cash flows.

Gold prices have corrected by 10-12 per cent in recent times. What steps does the bank take during declining gold prices when jewels are pledged for loans?

Even though the regulator allows up to 90 per cent loan against pledged gold, we advise customers not to opt for that ceiling, as gold prices are volatile.

In case gold prices continue to decline, the bank calls upon the borrowers to repay some part of the loan so that the LTV ratio comes down. In adverse circumstances, if for some reason that cannot be done, then we work with the borrower to see how we can auction the gold. But that is only done in exceptional circumstances. Normally, borrowers are co-operative and repay a part of the loan amount.