Submitted by admin on May 2nd, 2024
The evil impact of COVID-19 was manifested through not only piling death counts but also financial whirlwind even in its aftermath. There was hardly any chance of re-establishing a financial balance due to dwindling income and rising expenses. In such a scenario, paying EMIs became a big challenge for a larger section of the population, especially the middle-class segment. With many families on the verge of financial collapse, a way out came in the form of RBI’s loan restructuring scheme.
The Central Bank understood the seriousness of the situation and introduced the scheme so that people don’t end up defaulting on their current loans.
In this blog post, we will discuss the essence of loan restructuring and its benefits. So, keep reading till the end.
Definition of Loan Restructuring
Banks offer loan restructuring to help people avoid becoming defaulters on their existing loans. It provides borrowers, who have fallen on hard time due to liquidity crunch or financial turmoil, with a roadmap to renegotiate their loan terms and manage their repayments more easily.
At times, borrowers are also entitled to initiate the loan restructuring process if they fail to manage their timely repayments. Loan restructuring is done by reworking a loan with the existing lender or switching to a new lender, commonly called a “balance transfer’.
The purpose of loan restructuring is to help borrowers overcome financial difficulties. By renegotiating the terms and conditions of existing loans, borrowers can successfully avoid defaulting on loans and cope with adverse financial situations more efficiently.
Working Procedure of Loan Restructuring
The primary purpose of loan restructuring is to provide some much-needed respite to the borrowers and enhance the chance of receiving the money back for the lenders. Hence, it benefits both sides.
Here is a snippet of how loan restructuring functions:
Loan Term Extension: This extends the loan repayment period, thereby spreading out the total payable amount over a longer tenure. This results in downsizing monthly payment and makes it more manageable.
Interest Rate Reduction: This reduces the total volume of interest spread over the loan tenure.
Payment Deferral: Your lender may allow you to postpone your payments for a certain period.
Loan Principal Reduction: In some cases, your lender may even forgive a part of the total payable amount.
In times of financial turbulence, borrowers can explore different types of loan restructuring for efficient management of monthly payments. There are two major types of loan restructuring – Loan Modification and Debt Settlement.
Loan modification refers to a process that may involve interest rate reduction, loan tenure expansion or payment schedule readjustment, as agreed by the lender.
Debt settlement refers to a process where a lender accepts a hefty payment that is lower than the outstanding loan. Debt settlement is a possibility for those borrowers who have exhausted other options and are almost on the brink of filing for bankruptcy.