Loan Restructuring Process Overview

Loan restructuring is a process in which a lender modifies the terms of an existing loan to help the borrower manage their repayments, especially if they face financial hardship.Remember, the specifics of loan restructuring will vary depending on the lender's policies, so borrowers should contact their lender to understand their options.

Key Aspects of Loan Restructuring

  1. Types of Loan Restructuring: Loan restructuring can be done through:

    • Extending the repayment period

    • Adjusting the principal amount

    • Changing the amount of installments

    • Modifying the interest rate

    • A combination of the above methods

  1. Impact on Credit Score: Loan restructuring typically impacts credit scores negatively. Even if only one loan is restructured, lenders may report all loans as restructured, which can be seen as a negative signal by future lenders. However, borrowers can work on improving their credit scores over time.

Steps in the Loan Restructuring Process

  1. Assessment of Eligibility: The lender will assess the borrower’s financial situation and eligibility based on their policies.

  2. Evaluation of Restructuring Options: The lender may offer several restructuring options, and the borrower can select what best suits their financial needs.

  3. Formal Application: The borrower submits a formal application for restructuring, often with supporting financial documentation.

  4. Credit Impact Consideration: The lender informs the borrower of the credit score implications of restructuring.

  5. Approval and Agreement: If approved, the lender provides new terms, and the borrower agrees to the modified repayment structure.

Important Notes

Loan restructuring options and eligibility criteria vary by lender, so borrowers should reach out directly to their lender to understand the terms available to them. The decision to restructure a loan should be made based on a careful assessment of the borrower's financial needs and repayment capacity.

Loan Restructuring FAQs

Loan restructuring is the process by which banks work with borrowers to reduce the interest owed on their loans. A company or individual can use this process to restructure its debt and pay off more than originally negotiated.

Because defaulting on a loan would result in a rise in their non-performing assets, most banks and financial institutions agree to restructure the debt. However, your credit scores are adversely impacted when you restructure a loan. 

According to RBI guidelines, the following are eligible for loan restructuring:

  • Individuals and entities classified as Standard by the bank as of April 1, 2021
  • The COVID-19 epidemic must have a financial impact on the client in the form of a decrease/loss of income or cash flows
  • The only eligible accounts are those that are recorded on the bank's books as of April 1, 2021

At the bank's discretion, the loan's remaining term may be increased by a maximum of 24 months, including the moratorium period, to lessen the burden of your monthly EMI payments.

Loan restructuring will reduce your credit scores. However, once you pay your loan in full and in monthly installments, your credit score will improve. 

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