What is Loan Restructuring: Meaning, process & schemes

Loan restructuring is a financial tool that helps borrowers facing temporary financial distress by modifying the terms of their loans. This process enables individuals and businesses to manage their debt more effectively without defaulting.

Whether due to economic downturns, job losses, or unforeseen circumstances, restructuring allows for affordable EMIs, extended tenures, or a temporary moratorium. Understanding loan restructuring is essential for those seeking financial relief while maintaining their creditworthiness. You can also calculate your EMI with the IIFL Home Loan EMI Calculator.

Types of Loan Restructuring

Not all loan restructuring methods are the same. Different approaches cater to various borrower needs. Here are some key types:

1. Rescheduling of Loan Tenure: Lenders may extend the loan repayment period, reducing monthly EMIs. This is helpful for borrowers struggling with cash flow issues but willing to pay over an extended duration
2. Conversion of Unpaid Interest into a Term Loan: In some cases, accrued interest is converted into a separate loan, allowing borrowers to repay it in installments rather than as a lump sum.
3. Moratorium on Loan Repayment: A temporary suspension of payments for a few months allows borrowers to stabilize their finances before resuming regular payments.
4. Reduction in Interest Rates: Lenders may agree to reduce the interest rate, making monthly repayments more manageable. Depending on the borrower's situation, this can be temporary or permanent.
5. One-Time Settlement (OTS): For borrowers unable to repay their entire debt, lenders may offer a one-time loan settlement where a reduced amount is accepted as full repayment.

Loan Restructuring Process: A step-by-step guide

Restructuring a loan involves multiple steps to ensure a fair agreement between the lender and borrower. Here’s how it works:

Step 1: Borrower’s Request

The borrower must formally apply to the lender, explaining their financial distress and requesting loan restructuring.

Step 2: Assessment by Lender

The lender evaluates the borrower's repayment history, financial standing, and reasons for restructuring. This may include reviewing income statements, employment status, or business cash flows.

Step 3: Proposal for Restructuring

If deemed eligible, the lender proposes a restructuring plan, which may include tenure extension, EMI reduction, or a temporary moratorium.

Step 4: Agreement & Documentation

Once both parties agree to the new terms, legal documentation is prepared and signed to formalize the revised loan structure.

Step 5: Implementation & Monitoring

The new repayment schedule is activated, and the borrower must adhere to the restructured terms. Lenders monitor compliance and financial recovery over time.

Government Schemes for Loan Restructuring

The Indian government and RBI have introduced several schemes to assist borrowers in financial distress. Some notable ones include:

1. RBI Loan Restructuring Scheme (COVID-19 Relief): In response to the pandemic, the RBI introduced a restructuring scheme to support individuals and businesses impacted by economic disruptions.
2. MSME Loan Restructuring Scheme: Micro, Small, and Medium Enterprises (MSMEs) facing financial stress can avail restructuring benefits under RBI’s guidelines, helping them sustain operations
3. Corporate Debt Restructuring (CDR): Aimed at large businesses with outstanding loans, this scheme allows corporates to restructure debt to ensure business continuity and financial stability.
4. Strategic Debt Restructuring (SDR): Under this mechanism, lenders can convert a part of the outstanding loan into equity, giving financial institutions control over the business until it stabilizes

Important considerations to keep in mind

Before opting for loan restructuring, borrowers should keep the following factors in mind:

• Impact on Credit Score: While restructuring prevents default, it may still reflect on credit reports, impacting future borrowing capability.
• Additional Costs: Lenders may charge processing fees, legal charges, or revised interest rates, increasing the total cost of the loan.
• Eligibility Criteria: Not all borrowers qualify for restructuring. A strong repayment history and valid financial distress can improve your chances of eligibility.
• Long-Term Financial Planning: Restructuring provides short-term relief but should be aligned with long-term financial goals to avoid repeated debt issues.

Wrapping Up

Loan restructuring can be a lifeline for borrowers facing financial hardships, providing them with a sustainable way to manage debt. Whether through tenure extension, interest reduction, or government-backed schemes, restructuring offers multiple options to ease repayment burdens. However, before making a decision, careful consideration of its impact on credit scores and financial health is crucial.