Loan Restructuring in India: What It Means, Who It’s For, and How to Approach It

It is a possibility that any individual may face financial problems due to certain reasons such as the termination of a job, emergence of medical problems, decrease of business, or due to economic surprises. However, when the situation of paying the EMI is unfavorable, the first option that any individual may think of is to default the loan.

However, such an option is never available. The only option is the method of loan restructuring, which is available in India.

Let us first understand exactly what it means, how it works, and essentially what we need to consider while choosing it.

What Is Loan Restructuring?

Restructuring of loan involves a formal process by which the borrower and lender agree to modify the terms and conditions of an existing loan. This may involve:

•          Assisting in Extending the repayment tenure

•        Reduction of the EMI

•        Providing a temporary moratorium (pause on payments)

•        Terms of interest

•        Partial settlement in instances of extreme hardship

The idea is to prevent the loan from defaulting but still provide breathing room for the borrower.

Nevertheless, it is essential to note that restructuring is not immediate. This means that your lender will consider your request based on:

• Repayment capacity

• Past payment history

• Nature and type of loan

• Current Financial Stress

• Internal Bank Policies

Usually, alternatives for restructuring exist for term loans like a home loan, a personal loan, or even a business loan.

How to apply for a Loan Restructuring?

If you are having problems with EMIs, the first rule to remember is:

Do not wait for a default to occur before initiating the conversation.

Here's what you should do:

1. Visit Your Bank Branch

Loan restructuring is not usually done online. You need to visit the branch and discuss it with the branch manager or loan officer.

2. Explain the Reason Clearly

Be honest and transparent. Explain your inability to make the payments currently. It may be due to loss of job, reduced income, medical emergency, losses in business, etc.

There are greater chances of banks accepting valid claims of hardships where documentation is available.

3. Submit Required Documents

You may need to provide:

•   Income proof

•   Bank statements

•   Medical Bills (if applicable

•   Termination letters (in case of job loss)

An alternative repayment plan may be provided by the bank after the evaluation.

RBI’s COVID-19 Restructuring

The Reserve Bank of India had announced a one-time loan restructuring program during the period of the COVID-19 pandemic.

Key highlights:

• It was applicable to borrowers whose accounts were classified as “standard” as of February 2020.

• Reintroduced on May 05, 2021, due to the economic impact of the second wave.

• It was available to individuals with financial difficulties brought by the pandemic.

• The accounts must not be overdue for more than 30 days.

However, each lender had different eligibility norms under guidelines issued by the RBI. This was only a temporary relief and not a permanent facility.

Important Costs and Considerations

Though loan restructuring will reduce your EMI to a certain extent, there are some disadvantages too:

•   Higher total interest payable due to the longer tenure

•   Processing or restructuring fees

•   Possible impact on your credit profile

•   Lengthier financial commitment

It may help alleviate short-run cash flow problems but may raise long-run financial costs.

Other Considerations

There are not only loan restructuring options. Depending on your case, you may consider:

Moratorium

If your situation is temporary, you may request short-term forbearance. Short-term forbearance will temporarily suspend payments, although interest may still accrue.

Loan Consolidation

In case one has several loans, these can be clubbed into one EMI. This is most advantageous in case:

·       You are working

·       You have a good credit score rating.

·       You are eligible for a new consolidated loan

One Time Settlement

As the situation worsens in economic crises, especially for business loans, the creditor may agree to a smaller amount to close the deal. However, this might impact your credit score.

Specific Contexts

• Renovation Loans: If the funds have not yet been disbursed, one can opt for renunciation of those funds.

• Business Loans: We could explore it, or it may be better to liquidize the assets if the business is not yielding income.

When to seek professional advice

If debts are of a complex nature like multiple loan accounts, legal notices, and enforcement actions, then consider consulting:

• A certified debt counselor

• A Financial Advisor

• Lawyer: Legal Complications

Professional advice will also help you avoid unwise decisions, while making decisions against your long-term interests.

Key Takeaway

Rather, restructuring of loans is no shortcut or way to escape, but a method to offer the much-needed help to the troubled debtors.

The basic principles are simple:

•  Act early

•  Communicate clearly

•  Understand the costs

•  Evaluate alternatives

•  Make a long-term informed decision

However, if restructuring is wisely taken advantage of, it will give you the opportunity to protect your credit profile while seeking stability instead of succumbing to a situation of default.