What is Restructuring of Bank Loans?

The quarterly financial results of various public sector banks have shown losses. This has been a result of large Non-Performing Assets (NPAs) in their loan books. If you are just wondering what is an NPA, it is that loan which has failed to pay its installments even after 90 days of such installment becoming due. While RBI categorizes loans into various complex categories and has different NPA classification criteria for them, we are sticking to the most basic definition for the sake of simplification. Considering the visible stress in such overdue accounts, RBI also asks banks to make a provision for loss against such NPAs starting with 15% of the loan outstanding on the very first day of such loan being classified as NPA.

However, there may be times when the borrower is unable to pay the installments due to some genuine financial issues or just because of cash flow mismatches. In such a case, the borrower can approach the bank to restructure the loan taken. Bank will then evaluate the restructuring proposal in terms of its viability and then take a decision accordingly. If it is convinced that the existing stress in the loan can be addressed by restructuring the loan suitably, bank will approve such a restructuring and make an effort in putting life back into the loan.

Ways for restructuring of bank loans

1. Rescheduling the Loan Repayment 

The borrower can offer to just restructure the loan repayment schedule to match the operational cash flows. There might be situations when the business goes through long operating cycles and the cash flows may be skewed to some specific months instead of being spread evenly over the year. Similarly, the cash inflows may be lower in the earlier years but higher during the later years of the project. As such, rescheduling the loan repayment can help tide over such genuine operational issues.

2. Reducing the Interest Rates 

It may so happen that the interest rate at which the loan had been taken is higher than what it ideally should be. This change may have happened due to some regulatory changes or changes in the market for the product. Higher interest rates are not desirable and thus, the borrower may approach the bank to reduce the interest rates so that the loan continues to be in good standing. Reduction in the interest rates directly impacts the project cost favourably making it viable.

3. Waiver of Overdue Interest

The borrower may not have paid a couple of installments due to genuine financial issues. As a result of such default, banks generally charge some delayed/overdue interest to compensate for such delay. Such cost directly adds to the project costs. Further, bank policies are such that they generally adjust the overdue interest first at the time of regular installment. Hence, the borrower enters the vicious circle of some amount remaining overdue always and causing the overdue interest to continue increasing. In case the borrower makes regular payments subsequently, he can also approach the bank for waiver of overdue interest. Considering better and regular repayment history, banks are inclined to waive such amounts to encourage the borrower to stay regular in repayment.

How does restructuring of bank loans help credit score?

Restructuring aims at taking care of stressful loan accounts for genuine borrowers. The restructured loan takes into consideration the repayment issues along with operational difficulties for the borrower which is causing the account to stay overdue. An overdue loan will impact the credit score adversely as the amounts stay overdue on a continuous basis. As such, restructuring of bank loan will generally help eliminate such overdue amounts and hence, impact the credit score favourably.