LOAN RESTRUCTURING

By Antabikhya Gogoi, Legal Intern at Emkay Solutions and a 3rd Year B.A. LL.B.(Hons) Student at NLU Assam

INTRODUCTION

Loan restructuring is the process of modifying loan terms through a borrower-lender agreement. This financial aid is usually requested by debtors who are experiencing financial difficulties as a result of their inability to fulfill their initial payment obligations. Increasing the lender's chances of recovering unpaid monies and preventing default situations are the two goals of loan restructuring. It is a strategy used by companies, people, and even governments to negotiate lower interest rates and prevent defaulting on existing debts. Loan restructuring is a less costly option than insolvency when a debtor is experiencing financial difficulties. Both the creditor and the debtor can benefit from it.

The restructuring process involves various changes in the original loan structure like lowering the interest rate, extending the loan tenure, offering a temporary moratorium, or converting unpaid interest into a separate loan. These adjustments help borrowers manage repayments while allowing lenders to recover outstanding dues over time and prevents the account from becoming a NPA (Non-Performing Assets). The lender’s policies and the borrower’s financial situation usually sets the terms and conditions of loan restructuring. It may even vary depending on the same. In many cases, lenders may require proof of financial hardship before approving a restructuring request as only genuine cases are entertained.

PROCESS OF LOAN RESTRUCTURING 

Creditors are aware that they will get far less money if the person or business is forced into bankruptcy or liquidation. Loan restructuring can benefit both parties because the business avoids going bankrupt. The lenders make more money than they would have if they had filed for bankruptcy. Restructuring loans might benefit both parties since it keeps the business from going bankrupt.

1. Eligibility Assessment – The lender conducts a thorough evaluation of the borrower's financial position, including income stability, outstanding liabilities, repayment history, and the nature of financial distress. This assessment helps determine whether the borrower qualifies for restructuring under the lender’s policies and regulatory frameworks.
   

2. Review of Restructuring Options – Once eligibility is confirmed, the lender presents various restructuring solutions based on the borrower’s financial situation. These may include extending the loan tenure to reduce monthly EMIs, lowering the interest rate, converting unpaid interest into a separate loan, or offering a temporary repayment moratorium. The borrower is allowed to discuss and choose an option that aligns with their repayment capacity.
   

3. Submission of Application – The borrower must submit a formal request for restructuring, typically accompanied by supporting financial documents such as income statements, tax returns, bank statements, and proof of financial hardship. Lenders may require additional documentation to verify the borrower’s claims and assess their ability to meet the restructured terms.
   

4. Approval and Agreement Execution – If the restructuring request is approved, the lender drafts a revised agreement outlining the new repayment terms, revised interest rates (if applicable), extended loan tenure, and any additional conditions. Both parties must formally agree to these terms, after which the borrower resumes payments based on the modified repayment schedule.
   

RBI LOAN RESTRUCTURING SCHEMES

The pandemic’s economic impact led to severe financial difficulties for millions, affecting both business owners and salaried individuals, particularly those with outstanding loans. To provide relief, the Reserve Bank of India (RBI) introduced loan moratoriums and restructuring policies, enabling borrowers to temporarily pause loan repayments or modify their loan terms. However, with the second wave of COVID-19 causing further financial distress, the RBI revised its loan restructuring framework to support micro, small, and medium enterprises (MSMEs), small businesses, and individual business loan borrowers struggling with repayments. This initiative aims to provide much-needed financial flexibility and prevent widespread defaults among small businesses and individual borrowers. The updated scheme offers restructuring options but is only available to borrowers who meet the following criteria: 

• Outstanding business loan dues must not exceed Rs. 50 crore.
  

• The loan account must have been classified as standard by the RBI as of March 31, 2021.
  

• The borrower must not have previously availed restructuring under any earlier restructuring schemes

ADVANTAGES

• Prevents Loan Default – By modifying loan terms, borrowers can avoid default and legal consequences while maintaining their financial stability.
  

• Reduced EMI Burden – A longer loan term results in lower equated monthly installments (EMIs), which lessens the burden of payments., making monthly payments more manageable.
  

• Temporary Relief During Financial Hardships – It provides breathing space for borrowers facing temporary financial setbacks due to job loss, business downturns, or economic crises.
  

• Preserves Creditworthiness – Although restructuring may impact credit scores, it is less damaging than loan defaults, helping borrowers maintain access to future credit.
  

• Continued Business Operations – For businesses, restructuring allows them to sustain operations and improve cash flow without the risk of insolvency.

  
  

• Regulatory Support – During economic crises, central banks (such as the RBI) introduce restructuring schemes to support borrowers, making the process more accessible.

DISADVANTAGES

• Extended Loan Tenure – While lowering EMIs, extending the loan term increases the overall interest paid, making the loan costlier in the long run.
  

• Higher Interest Costs – Some lenders may charge additional interest or restructuring fees, leading to a higher total repayment amount.
  

• Lender’s Discretion – Approval for restructuring depends on the lender’s policies and the borrower’s financial assessment, meaning not all applicants may qualify.
  

• Risk of Over-Reliance on Debt – Borrowers who frequently opt for restructuring may develop unhealthy financial habits, relying on restructuring instead of improving financial management.
  

CONCLUSION 

Loan restructuring serves as a vital financial tool for borrowers struggling with repayment difficulties, offering them an opportunity to regain stability without defaulting. By modifying loan terms through tenure extensions, interest rate adjustments, or temporary moratoriums, restructuring helps individuals and businesses manage financial hardships more effectively. However, while it provides short-term relief, restructuring can also lead to higher long-term costs, credit score impacts, and lender-imposed conditions. Borrowers must carefully evaluate their financial situation, explore alternative solutions, and understand the implications before opting for restructuring. Ultimately, loan restructuring balances the interests of both borrowers and lenders, ensuring financial recovery while maintaining stability in the banking system. When used strategically, it can be a powerful tool for overcoming temporary financial setbacks and achieving long-term financial resilience.