Loan Restructuring: Is It Right For a Debtor?

This instrument has purposes wherein it supports borrowers in their financial distress, support creditors or lenders, and reduce their losses

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There is a famous line we all love to say, ‘keep the candle of hope burning’, and this very hope is the basis of the term debt restructuring. A debtor who seeks restructuring is basically hopeful that the cash flows will improve in the future and that he would not enter the defaulter’s list. Similarly, on the other side of the grass, the lending institution is also working on hope that the restructuring would help him recover the loan even if the interest rates are lowered or the time limit is extended.

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Loan restructuring began with the corporate debt restructuring (CDR) where the framework was established by the government of India and the Reserve Bank of India on the same lines as those prevalent in the UK, Thailand, Malaysia, etc. The initiative was to measure the viability and rehabilitation factors of the corporate entities and ensure a timely and transparent mechanism to counter the bad debt situation. The CDR helps entities that had best intentions while seeking or receiving debt, but factors beyond their control hampered their intentions and made the timely loan repayment a difficult task.

The similar situation where factors beyond the human control hamper intentions happen to both corporates as well as individuals. Since 2020, the entire world is on tenterhooks thanks to a virus whose origins are unknown and has sent the world into an uncertainty where we do not know which variant will send us into another house arrest. This has been difficult for businesses and individuals alike, with businesses shutting down and job loss and pay-cuts tormenting the masses. This year specially has been difficult with spike in the mortality rates, many families having lost their breadwinners. In such a situation, the second part of loan restructuring has been a relief, wherein individuals still have some hope. Hope you see is the base word. While coping up with the grim realities and an economy trying to slowly and steadily emerge out of the blow it has suffered, the hope for a better default-less economy is something even we as a debt collection platform are banking upon.

This instrument has purposes wherein it supports borrowers in their financial distress, support creditors or lenders and reduce their losses, preserve the financial sanctity of the borrower (especially when hit by causes beyond their control), and ensure liquidity and cash flow that ultimately helps in the financial planning and keeps non-performing asset (NPAs) at bay. We must know of these purposes and only then can we move to the next step and which is helping our readers, be it individual or corporate, to understand why we also believe the debt restructuring to be a favorable option for them.

For the corporate, the restructuring is a handy tool to sustain their business and survive through the difficult times. The instruments helps them free up the cash as the rates are reduced and prevent cash mismatch in their accounts. The reduction in the interest rates can also help with some ready finances for the future plan. The same reduced interest also opens up the doors to better organize your finances and if you opt to unify all the loans into one and choose a long-term loan scheme with manageable interest rate and installments, your future would take a turn towards progressive. Also, for the entities unable to pay, the conversion of debt to equity is also a handy instrument.

The householders and individual debtors also need to wake up to the benefits, especially that the blanket moratorium granted by the RBI last year is unlikely to be repeated as it puts a huge stress on the lending and recollection of the loan, and thereby on the entire ecosystem. The Resolution Framework 2.0 given by the RBI, in continuum to the one-time restructuring offered last year, has been designed to cover the credit card loans (consumer durables and receivables), auto loans and personal loans. The discretion to extend the beneficiary instrument or charter a plan for other loans such as home loans, education loans, etc., have been left to the discretion of the banks. The other discretion given to the banks is to pick the debtors who can receive this benefit. So if your loan is a standard one and is below INR 25 crore mark, please go on to seek the instrument. The plans can be modified by your bank and if required, you can be given a moratorium for a certain period (maximum of two years) after reviewing your income streams. If not the moratorium, the lower EMIs for longer duration and with the reduced interest rates can help you improve your financial cash flow and plan for a better future. In future, if your income or cashflow strengthens, you can go for foreclosure and live debt free. The bank/s can also convert the interest accrued into another credit facility and thereby adds to the win-win hamper.

The bank/s are supposed to make a decision on whether or not to grant the restructuring within one month, hence there is no waiting game involved, and once granted the resolution plan has to be implemented within 90 days since the date of invocation.

We have broadly covered the benefits for the debtors, but what ultimately benefits is the economy, and for the bigger picture and our own sake, one should opt for such helpful instruments remain hopeful for better times, after all hope is what we started this piece with.