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.
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.