In simple terms, restructured loans are the replacement of the older loans with a better affordable loan.
The purpose of debt restructuring is to help the borrower from the financial risk of insolvency.
It is the advantage for the individual or business to get another chance to repay their loan
at a lower available interest rate.
A restructured loans can be the win-win situation for both the party either for the lender
or for the borrower.
If you have any business in your hand and facing the difficulty, You can also manage
your debt through a restructured loans.
So how you can restructure your loan, let’s know the ways
Several ways to make restructuring your bank loans
#1.Rescheduling the Loan repayment
If the bank feels Business is going to bankruptcy in the near future, they postpone the repayment
schedule date and give the company another chance to repay the money.
On the other hand, there might be a situation when the business is yet to generate income after
some specified time from the investment.
So at that time Bank should allow them to properly structuring the company until the profit has been generated. So that both the company and bank can face a win-win situation without losing anything.
Difference between restructuring and rescheduling of loan
- Restructuring the loan is the exchange of one loan to another whereas rescheduling is to
delay the date after some specified time.
- In restructuring waiver of charges can be applicable but in case of rescheduling no waiver
of charges is applicable expect only time.
- Loan rescheduling involves no documentary process whereas restructuring loans involves a set of documentary processes.
2. Reducing Interest Rate
Generally, Banks and some NBFCs Provide loans so that the business can invest in working capital of the business. But If a business feels the Interest rate is higher than the expected rate that’s why the company can’t afford working capital then Bank should help them.
If Interest Rate is reduced, the businessman can pay the installment easily to the lender. After that Both the lender and borrower can grow their business.
In this case, the bank may not aware of the possibility of future insolvency but the company should request
the bank for immediate action.
3.Waiver of overdue charge
During the financial crisis, some company might not pay 2 or 3 installments to the bank
As a result, the Bank may charge huge delayed/overdue charges on the company in order to compensate such
The company has to face a huge loss due to the bank’s policy where they collect EMI at the initial stage of the installment.
At this time Bank or NBFC should help the Company for their establishment and they should help to reduce
Companies and businesses can talk with each other in order to make an overdue settlement.
4. Debt Equity swap method
Debt for equity swap is a method of exchanging company debt with equity in order to waive off the loan from the lender.
If any company wants to restructure its loan, it will issue equity to the bank for adjusting the debt-equity ratio.
How the debt-equity swap method works
- Both lender and Borrower should agree with the method in order to make the debt-equity swap
- Cash of loan payment is no longer necessary as the loans are partly/fully paid through Debt-equity swap
- The lender usually receives equity less than the face value of the stock but more than the depreciated market value
- Govt entities like banks, oil refining companies, and Railways can also exchange their debt with equity.
- All the shareholder of the company has the right to exchange their stock or equity for a predetermined amount of debt in the company.
when a company X borrows $100 million from the lender for a certain period of time.
But due to certain condition, company X is facing the financial crisis and for that, Company
X is unable to pay the loan. What Company X decides is to provide $20 million dollar equity to
the lender for the debt-equity swap which is 20% equity for the company.
#5. Restructured loans RBI guidelines
Another debt restructuring is introduced by the RBI in June 2015
which is known as strategic debt restructuring.
Strategic debt restructuring aims to recover its loan from the distressed listed company.
How Strategic debt restructuring construct?
- The outstanding loan can only be taken by some members of the lending institution.
Such a member is known as Joint Lender Forum
- Bank and a financial institution like NBFCs are the members of JLF
- JLF has the authority to take the stake of the company
.Major features of the SDR scheme
- JLF(joint lender forum) has the right to taking a major/partly share of the company.
- The major decision is taken by a member of the community from JLF.
- JLF should hold at least a 51% share of the company For ailing the company.
- If Bank or JLF adopt the SDR scheme then the bank would claim 18 months’ time from
the RBI to acquire the fully/partly share of the company until the loan declared as
- Under this scheme, the Bank can recognize Interest as accrued but not due/paid as income.
- If the bank can’t sell the company within 18 months, RBI will declare the loan as
#6. Refinancing the loan with a new lender
Refinancing is another great way to restructure the loan where you can get a better loan type to equip with the
standard of your business.
You can apply with another bank to refinance the existing loan with a better feature option so that you can survive
from the bad debt.
How does refinance helps you?
- Saves money– Refinancing the loan saves a lot of money because of lower interest rate
- Shorten loan term- Instead of extending the term, the borrower can reduce the tenure in order to
save extra interest
- Consolidate loans-If your business has multiple loans then you can consolidate all loan with one single loan
- settlement of loan that’s due- If the business has a large sum amount of debt and paying a higher amount of installment then he can do settlement. By refinancing the previous loan Businesses can be deprived of large
EMI and can pay the smaller Installment amount.
- Change the Loan type-You can also change the loan type of your business If you think in future Interest can be reduced. For example, If You have fixed Interest rate then you can also change it with a variable Interest rate
Some Important Facts you should know before refinancing the loan
- Transaction cost for refinancing can be costlier.
- Loan balance can not be changed if unless you take more debt while refinancing
- If you use collateral for refinancing the loan then you could lose the collateral property
(For example- Your land can be repossessed by the lender whom you refinance
your landlord loan)
- You can only apply for refinancing the loan when you have a better credit score
If You are planning to refinance any business you can consult with the bank regarding this because most of them
can help The business.
Reducing the Interest rate will be the best choice for any business If they contact to Bank.
The restructured loans help to maintain a good credit score for genuine customers if they fail to pay the loan due to some financial crisis.
Yes, A Restructured mortgage can be possible like a home borrower can restructure loan EMI into affordable EMIs.
Yes, The NPA account can be restructured but with a certain condition of the governing act.
Financial restructuring is a process of reorganizing the assets and liabilities of the business organization.