The current Covid-19 situation has made many borrowers rethink their loan repayment strategy. Uncertainty in jobs, non-payment of invoices, the general lull in the business are all some of the factors dampening the economy and in turn, affecting loan repayments.
To counter this issue, the RBI announced a ‘one-time loan restructuring’ scheme. This scheme allows borrowers to negotiate with the bank for better terms on their existing loans. The scheme aims at offering a better chance to the borrowers to repay their loans.
A bank may follow different ways of debt restructuring:
- Increasing the loan tenure
- Negotiation a lower interest rate
- Reducing the total outstanding debt
- Bringing a past-due account up to date and applying the outstanding part to the principal balance
- Debt for equity swap refers to a situation in which a company's creditors agree to forgive any or all of its debt in return for equity in the company
- A bond haircut is when a company negotiates to write off a part of the interest or capital on a bond
How is Debt Restructuring Beneficial?
The best-case scenario for the lender is to be able to prevent the portfolio from going negative, which means lower provisioning under the current restructuring guidelines. As a result, banks' profit and loss statements improve. On the other hand, the borrower is given an additional time period to either recover their company or obtain new capital from outside sources, which may be convertible debt or equity to repay the loan. Payment obligations are being restructured to make repayment easier.
In simple terms, loan/debt restructuring applies to the borrower's current loan arrangement terms being changed. This is to make handling the loan principal and interest obligations to the lender, whether it's a bank or a non-bank financial institution, easier. Use the restructuring option only if you have a detailed repayment plan in place and are sure you won't need a large amount of money anytime soon.