One-Time Loan Restructuring – Definition, Advantages, and Disadvantages
February 16, 2021
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What is Loan Restructuring?
Loan Restructuring fundamentally means the modification of the loan terms and conditions. When a borrower faces financial distress, he can opt to revisit, negotiate and revise the loan terms and reduce the chances of any payment default. The loan restructuring process can be initiated by extending the loan tenure with or without changes in the rate of interest. By having the payable principal amount distributed to a longer repayment tenure, this approach offers huge respite to the borrowers by considerably bringing down the EMI burden. Other restructuring approaches that aid a distressed borrower include conversion of all the accrued interest to a new loan account, offering a moratorium, or reduction of the interest rate. Which approach should be adopted for restructuring an eligible loan is something at the discretion of the lending bank, and as per the requirement of the borrower.
What is a one-time loan restructuring scheme?
As per the Reserve Bank of India (RBI) directives, banks and financial institutions can implement a recuperative plan for their financially affected customers trapped in the economic fallout that resulted from the COVID-19 pandemic. The resolution plan can also permit additional credit facilities or extend the remainder loan tenor by a moratorium not exceeding 2 years. The one-time loan restructuring scheme can be availed by individuals and entities who are likely to default their EMIs due to loss of income compelled by the pandemic. They must also not have any overdue EMI for more than 30 days as of 1st March 2020. For MSMEs, this period is 89 days, who have availed a loan of less than 25 crores. Lending banks can recognize these loan accounts as standard and need not book them as Non-performing assets (NPAs). Now, with the new One-time loan restructuring scheme, a lender can restructure debt without replacing owners of the affected company, which was not permitted as per the previous restructuring guidelines. The invocation of the one-time loan restructuring was to be completed by 31st Dec 2020 and must be implemented in 90 days from the date of invocation for individual cases and by 180 days from the date of invocation for business entities.
What are the advantages of one-time loan restructuring?
- Reduced repayment commitment: Monthly EMI gets considerably reduced with the increased loan tenure that enables even distribution of the payable principal across the entire period.
- Positive P&L impact: With the advent of the one-time loan restructuring scheme, banks and financial institutions can now avoid these loan accounts from being declared as Non-performing assets which provide a positive boost to their books.
- Increased repayment window: With the increased loan tenure or by availing the 2-year moratorium, a borrower can shake a lot of worry off his shoulders and use that time to revive financially.
What are the disadvantages of one-time loan restructuring?
- Negative impact on credit score: Loans that are recorded under the one-time loan restructuring scheme negatively hits the credit history of the borrower and leads to stringent financial scrutiny in case he applies for another loan. Also, as per regulatory guidelines, to report a particular loan as “Restructured” to the credit bureau, all the other loans of the same individual or entity automatically gets categorized as “Restructured” even though the facility has been availed to effect a single loan account.
- Reduced borrowing capacity: If the loan tenure is increased through the one-time loan restructuring scheme, it negatively impacts the borrowing appetite/ capacity for that additional period until the restructured loan is cleared. One-time loan restructuring is ideal for those who do not have a large financial requirement during the extended period.
- Increased borrowing cost: Although the one-time loan restructuring scheme reduces the EMI burden by increasing the loan tenure, on the contrary, it entails continual payment of the rate of interest that was imposed as per the terms of sanction. This means the borrower ends up paying a higher interest than originally envisaged. One-time loan restructuring also involves a fee that adds up to the cost.