Loan Restructuring
Loan Restructuring usually refers to making changes to the original terms and conditions of a loan agreement. It is usually done when a borrower is facing financial difficulties and is unable to fulfill the conditions of the loan. Loan Restructuring aims to provide the borrower with some relief by adjusting the repayment schedule or other terms of the loan to make it more manageable. The specific details and options for loan restructuring depend on various factors, including the type of loan, the lending institution policies, and the borrowers current financial situation.
What is Loan Restructuring 2.0 Scheme?
The Restructuring Loan is a loan restructuring framework introduced by the Reserve Bank of India (RBI) in May 2021 to provide relief to borrowers facing financial difficulties, particularly in the context of the COVID-19 pandemic. This framework allows banks and financial institutions to offer borrowers the option to restructure their loans based on certain eligibility criteria.
Under the RBI Loan Restructuring Framework 2.0 scheme, borrowers who were classified as standard as of March 31, 2021, were eligible for restructuring. This included individuals, businesses, and MSMEs impacted by the pandemic-induced economic slowdown. Borrowers who had previously availed themselves of restructuring under earlier frameworks were also eligible, subject to meeting the necessary conditions. The restructuring options provided by lending institutions include extending the repayment period, granting a moratorium on principal and/or interest payments, converting interest into a term loan, and other suitable measures. The relevant banks, NBFCs, or other financial institutions decide on the specific terms and conditions of the restructuring.
It is important to note that borrowers who opt for loan restructuring will be treated as “restructured accounts,” which may have implications for their creditworthiness and future borrowing ability. However, the RBI has provided certain relaxations to mitigate the impact on credit scores. It is advisable to refer to the latest guidelines and notifications issued by the RBI or consult with the lending institutions to obtain accurate and up-to-date information on the specific details and conditions of the Restructuring Loan 2.0 framework.
Loan Restructuring Guidelines
The Reserve Bank of India’s (RBI) Loan Restructuring Guidelines are instrumental in shaping India’s financial landscape, especially during times of economic uncertainty and crisis. These guidelines provide a comprehensive framework for banks and financial institutions to restructure loans, offering borrowers much-needed relief when facing financial hardship. Typically issued in response to exceptional events like the COVID-19 pandemic, these guidelines outline eligibility criteria, encompass various loan categories, and specify the terms of restructuring that banks must follow. They emphasise the importance of transparent and fair practices, ensuring that borrowers and lenders enter into formal agreements clearly defining new terms, which may involve extending loan tenures, reducing interest rates, or offering restrictions on principal and interest payments. Moreover, these guidelines establish reporting and provisioning norms for restructured loans, ensuring banks maintain adequate capital reserves to absorb potential losses. RBI periodically updates these guidelines to adapt to the changing economic landscape, reflecting a commitment to balance financial stability with supporting borrowers and financial institutions during challenging economic times. Overall, the RBI’s Loan Restructuring Guidelines serve as a crucial mechanism for managing financial crises, fostering responsible lending practices, and aiding borrowers and financial institutions in navigating uncertain economic conditions.
How does bank loan restructuring work?
When a company or individual is about to go through foreclosure, they try to restructure their debt. Debt restructuring generally includes asking banks to agree to reduce interest rates on loans, extend the period during which the individual or business has to make payments, or do both. These steps increase the possibility that the individual and company will be able to pay their debts and continue to function. Borrowers are aware that their amount paid will be significantly reduced if the individual or company goes into bankruptcy or liquidation. Because the company can avoid bankruptcy, loan restructuring can benefit both parties. The lenders receive more money than they would have in the event of bankruptcy
Types of Restructuring Loans
Debt for equity swaps are financial transactions in which the debt obligations of one firm are exchanged for the equity or ownership of another company. It means that the bondholders or lenders agree to exchange some or all of their debt for equity in the business. For a financially unstable business, this can be a smart move towards debt relief and financial stability, as it gives creditors a share in the company’s future success. It’s a common method of business restructuring when insolvency is at hand or to improve a company’s balance sheet.
The term “Renegotiating Repayment Terms” describes the method by which a borrower can modify the terms and conditions of a loan or other financial obligation to make it more affordable. This typically involves adjusting factors such as interest rates, loan duration, monthly payments, or even the total amount owed. Renegotiating repayment terms is often done to avoid defaulting on a loan or to address changing financial circumstances. Either the borrower or the lender can start it, and both parties may need to negotiate and agree.
A bondholder haircut is a financial term that refers to a reduction in the face value or principal amount of a bond. When a bond issuer is in financial trouble or is about to become insolvent, the government or a financial institution will typically impose this reduction. Bondholders agree to accept a lower repayment amount than the original face value of the bond as a way to help the issuer manage its debt burden and avoid default. The haircut is essentially a loss that bondholders must bear, and it is a measure taken to stabilize the issuer’s financial situation. The specific terms of a bondholder haircut, including the percentage reduction in the bond’s value, are typically determined through negotiations or in accordance with relevant legal or regulatory frameworks.
Payment deferment refers to the practice of postponing or delaying a scheduled payment, typically for a loan, credit card, or other financial obligation. This temporary relief allows borrowers to address financial challenges without facing immediate penalties or negative consequences, such as late fees or credit score damage. Payment deferment terms vary depending on the lender and the specific agreement, but they often involve moving the due date to a later time or extending the loan term. It is important to note that while payment deferment can offer short-term financial relief, it may also result in increased interest or additional costs in the long run, so borrowers should carefully consider the implications before opting for deferment.
Debt consolidation is a financial strategy aimed at simplifying and managing multiple debts more efficiently. It involves taking out a single loan or credit line to pay off existing debts, thereby merging various outstanding balances into one, often with a lower interest rate. This approach can make it easier to keep track of payments and reduce overall monthly obligations. Debt consolidation can be achieved through methods like personal loans, balance transfer credit cards, or home equity loans. It can provide relief to individuals overwhelmed by debt and help them work towards becoming debt-free by streamlining their financial obligations into a more manageable and structured plan.
Which loans are eligible for Restructuring?
Home Loan
Borrowers often secure home loans, making them eligible for restructuring. This means that the lender has the right to take possession of the home if the borrower defaults on the loan. Home loans may be restructured in several ways, such as by reducing the interest rate, extending the repayment term, or both.
Car loans
Borrowers can often restructure car loans because they are secured by the borrower's vehicle. This means that the lender has the right to take possession of the car if the borrower defaults on the loan. Car loans may be restructured in some ways, such as by reducing the interest rate, extending the repayment term, or both.
Personal loans
Personal loans may be eligible for restructuring, but this is less common than home or car loans. This is to ensure the lender has fewer options if the borrower defaults, as personal loans are often not secured by any assets. Personal loans may be restructured in several ways, such as by reducing the interest rate, extending the repayment term, or both.
Business loans
Business loans may be eligible for restructuring, but the terms of the restructuring will depend on the specific circumstances of the business. Business loans may be restructured in many ways, such as by reducing the interest rate, extending the repayment term, or both.
Credit card debt
Credit card debt may be eligible for restructuring, but this is typically only possible if the borrower has a good credit score and a history of making on-time payments. Credit card debt may be restructured in several ways, such as by consolidating the debt into a single loan with a lower interest rate, or by negotiating a settlement with the creditor.
Student loans
Student loans may be eligible for restructuring, but the terms of the restructuring will depend on the specific type of student loan and the lender. Federal student loans may be eligible for many repayment plans, including income-driven repayment plans, which base the monthly payments on the borrower's income. Private student loans may also be eligible for restructuring, but the terms of the restructuring will depend on the specific terms of the loan and the lender.
Medical debt
Medical debt may be eligible for restructuring, but this is typically only possible if the borrower can prove that they are unable to afford to repay the debt. Medical debt may be restructured in some ways, such as by negotiating a settlement with the creditor or by filing for bankruptcy.
Pros of Loan Restructuring
Improved cash flow:
If you are struggling to make your current payments, restructuring your loan can help you free up some cash flow.
Increased flexibility:
Restructuring your loan can give you more flexibility in how you make your payments.
Improved credit score:
If you make your restructured payments on time, it can help improve your credit score.
Avoiding bankruptcy:
If you are struggling to make your payments & are at risk of default, restructuring your loan help you avoid bankruptcy.
Frequently Asked Questions
Loan restructuring is a process where the terms of a loan are changed in order to make it more affordable for the borrower. This can include things like extending the loan term, lowering the interest rate, or reducing the monthly payment amount.
Secure Finance offers several benefits to loan restructuring, including:
- Making your monthly payments more affordable.
- Lowering the total amount of interest you pay throughout the loan term.
- Improving your credit score.
- Avoiding foreclosure or bankruptcy.
The scheme is offered to those affected by the COVID-19 pandemic, including individuals, enterprises, and MSMEs with loans up to Rs. 50 crore. Your loan should have been classified as standard (not in default) as of March 1, 2021, to qualify.
Home loans
⦁ Auto Loans
⦁ Personal Loans (for personal use and for business or commercial purposes)
⦁ Credit Card
⦁ Education Loans
⦁ MSME loans with Udyam certificates
No, You are applicable to apply for a restructuring loan only once.
Under its Resolution Framework 2.0, the Reserve Bank of India (RBI) has set a maximum duration of 24 months for loan restructuring in India. The 24-month maximum term imposed by the RBI should only be considered as a general guideline. Depending on the borrower's unique situation, lenders might be willing to extend the repayment period for longer.
There are several different types of loan restructuring, including:
Moratorium: This is a period of time during which you do not have to make any payments on your loan.
Interest rate reduction: This is a change in the interest rate on your loan, which can lower your monthly payments.
Loan term extension: This is an increase in the length of time you have to repay your loan, which can lower your monthly payments.
Principal reduction: This is a reduction in the amount of money you owe on your loan, which can lower your monthly payments.
Secure Finance offers a flexible loan restructuring process that can be completed online, in person, or by mail. Our experts will review your application and documentation to determine your eligibility, and we will work with you to create a revised loan agreement that reflects the new terms of your loan
Any borrower who chooses the loan restructuring plan will have a reflection of that decision in their credit history and report. This will be part of the section named "Account Restructured Under COVID 19."
Depending on the lender and type of loan, various loans may have different eligibility requirements for loan restructuring. However, in general, you may be eligible for loan restructuring if you are experiencing financial hardship and you are unable to make your monthly payments. For more details you can check our website.
You must provide the bank with all the documents that describe your current employment or business status. The bank can ask for bank statements and salary slips from salaried borrowers. The bank can ask for GST returns, bank statements, Udyam certificates, Income tax returns, etc. from self-employed individuals or businesses.
Your EMI amount can be reduced by up to 25% of the current EMI under this scheme. Restructuring loan tenure can be extended by up to 2 years to achieve this reduction.
There are several alternatives to loan restructuring, such as:
Debt consolidation: This is a process where you combine all of your debts into one new loan with a lower interest rate.
Debt settlement: This is a process where you negotiate with your creditors to reduce the amount of debt you owe.
Bankruptcy: This is a legal process that can help you discharge some or all of your debt.
After your loan has been restructured, you will need to make sure that you make your monthly payments on time. If you do not make your payments on time, you could default on your loan and the lender could take action to collect the debt. You should also monitor your credit score to make sure that it is improving. If your credit score is improving, it will be easier for you to obtain credit in the future.