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Loan restructuring is a process that helps MSMEs restructure their loans for easier repayments. This process helps MSMEs to modify the terms of their business loan EMIs if they find any difficulties in repaying their loans.
What is loan restructuring?
When the bank changes the conditions of your repayment including the time of payment, EMI and the interest rate, it is called business loan restructuring.
When COVID-19 began many businesses faced difficulties repaying their bank debts in the face of massive business losses. Realising the ordeal of businesses, especially MSMEs, RBI mandated that MSMEs could restructure their loan to allow easier payments and prevent any defaults.
Here are some of the modifications that can be applied to a stressed loan account:
- Changes in the amount that borrower must repay
- Modifications in the number of instalments
- Reduction in the repayment period
- Business loan interest rate charged is modified
- Scope for additional loan provisions
Benefits of loan restructuring
Here are few benefits of restructuring your loan:
- Customers who have suffered financial losses or reduced income/cash flow due to the COVID-19 epidemic are eligible to apply for loan restructuring.
- Prevents defaulting on loan
- Reduced EMI amount
- Chances of reduced interest rate
Do note that loan restructuring can negatively affect your credit score, according to banking experts. If you have only applied for loan restructuring once the impact will be much less. Lenders usually consider restructured debts as willful defaulting because in the accounts of the lender restructured loans are classified under settled or ‘written off’ section. This will affect your chances of getting a loan sanctioned in the future.
RBI circular on loan restructuring
RBI issued a circular publishing guidelines for restructuring MSME loan accounts called Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances on January 1, 2019 and then an amended version called the Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs).
The latter is the latest RBI circular on restructuring of loans. The guidelines published gave clarity on the eligibility for restructuring MSME loans and method to follow for restructuring.
According to RBI guidelines on loan restructuring before COVID-19, once a business loan is restructured it falls into the category of ‘sub-standard’ loan from ‘standard’ loan. The new restructuring mandate after COVID-19 struck off this change and notified all banks and NBFCs that need not classify loan as substandard for MSME loan accounts that have applied for restructuring.
“In view of the continued need to support the viable MSME entities on account of the fallout of Covid19 and to align these guidelines with the Resolution Framework for COVID 19 – related Stress announced for other advances, it has been decided to extend the scheme permitted in terms of the aforesaid circular. Accordingly, existing loans to MSMEs classified as ‘standard’ may be restructured without a downgrade in the asset classification,” according to a circular from RBI.
Understanding standard and substandard assets
Standard assets and substandard assets come under the Non-performing Assets (NPA) category and are terms used in banking. Simply put, NPA is the amount of loan that was not returned by the customer.An asset becomes non-performing when it stops generating income for the bank. Any asset that is not generating income in the form of principal or interest for more than 90 days will be considered as NPA.
Standard assets are loan accounts that will give a regular income once they are due, and the only risk associated with it is losses faced by the business and eventual default. This should not be considered as NPA. Substandard assets are assets which have remained NPA for a period less than or equal to 12 months.
The RBI guidelines mentions who can apply for restructuring under the Restructuring rules:
- The borrower should be classified as a micro, small or medium enterprise as on March 31, 2021
- The borrowing entity must be GST-registered on the date of implementation of the restructuring. This condition will not apply to MSMEs that are exempt from GST-registration.
- The total amount of loans taken by the borrower, including non-fund based facilities, should not exceed ₹25 crore as on March 31, 2021.
- The new restructuring scheme under RBI is only available to MSMEs making regular payments and the loan payment due hasn’t crossed 30 days of non-payment as of March 1, 2020.
- Entities with business loans from financial institutions including commercial banks (including small finance banks, local area banks and regional rural banks), primary (urban) co-operative banks/state co-operative banks/district central co-operative banks, All-India Financial Institutions and NBFCs.
- The borrower’s account was a ‘standard asset’ as on March 31, 2021.
How to apply for loan restructuring?
If you want your business loan restructured, you must approach the bank you have taken the loan from. Most banks have a form for loan restructuring drafted under the norms of the new RBI guidelines.
For example, for SBI loan restructuring visit the ‘Announcements’ page. Here the bank has given a link to the ‘Format of Application for restructuring (for loans up to Rs 10.00 lakhs) for use by MSMEs/Business Enterprises under Resolution Framework 2.0 guidelines.’
Since the new restructuring guidelines depend on the reduction in revenue and profits caused by COVID-19, the bank will review the documents provided by the company which indicate the drop in cash flow due to COVID-19.
The bank will evaluate the capability of the company to pay the restructured EMIs based on the documents provided. Besides, the bank will check the repayment track record of the customer, credit bureau records, etc., before granting the restructuring.