Loan restructuring
Also called: Debt restructuring (bank loans) · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
Loan restructuring means changing a loan's terms for a borrower in difficulty so that the borrower does not default. The bank may extend the tenure, cut the interest rate or change the repayment schedule. Done honestly, it can save a viable business. It was misused during India's NPA crisis. Under regulatory forbearance (relaxed rules), restructured loans could be counted as standard assets until April 2015, which hid the true level of bad loans. The schemes failed one after another: CDR (2001), JLF, 5/25, SDR and S4A (2014-16).
Example
A power company cannot meet its EMIs because a coal block was cancelled. Its bank stretches the repayment period from 10 to 15 years and cuts the interest rate so the company can keep paying.
Don't confuse with
- Evergreening: giving a fresh loan to a struggling borrower so it can repay old dues. It hides the problem instead of changing the terms openly.
- One-time settlement: ends the loan when the bank accepts a smaller lump sum. Restructuring keeps the loan alive on new terms.
Related concepts
- Twin balance sheet problem
- Evergreening
- Asset Quality Review
- Bank recapitalisation
- Loan write-off
- One-time settlement
- Wilful defaulter