Managing existing loan repayments, especially when you are facing financial distress, can be a challenging task. Borrowers who are facing unexpected financial hardship - such as job loss, medical emergencies, or business downturns – may not find it easy to meet their EMI payments.  

In such cases, loan restructuring offers a solution that allows borrowers to adjust the terms of their loan to make repayments more manageable, helping them avoid defaults and maintain financial stability. 

It is the process of modifying the terms of an existing loan to make the repayment easier. It is different from loan refinancing, which involves taking out a new loan to replace the old one.  

Loan restructuring retains the original loan while altering certain terms like the loan tenure, EMI amount, or interest rate. The borrower continues to repay the loan but under more flexible terms. 

Banks offer several types of loan restructure options depending on your situation: 

1. EMI restructuring reduces your monthly payment by extending tenure. Same principal. Same interest rate. Longer time to pay. Lower monthly burden. 
2. Interest rate modification adjusts what you're charged going forward. Temporary reduction sometimes. Helps during specific hardship periods. 
3. Moratorium provides complete payment pause. No EMIs for a defined period. Interest might still accumulate. But no immediate payment pressure. 
4. Principal adjustment happens rarely. Usually in severe cases. Part of what you owe gets modified. Banks don't love this option. 

The Reserve Bank of India (RBI) doesn't leave restructuring to the discretion of individual banks. There are clear rules and frameworks for this purpose that every lender must follow. 

Banks must assess genuine stress in loan repayment versus wilful default by a borrower. There are also specific documentation requirements that help to distinguish between the two. 

Classification rules matter too. Restructured accounts don't automatically become bad loans. But they do get flagged differently in bank books. Lenders must maintain extra provisions against restructured portfolios.

Not everyone qualifies for restructuring under RBI norms.  

The loan must be standard before restructuring. In case the borrower has already defaulted on the loan, the options narrow considerably. Timing matters as well. You should apply for restructuring before missing any EMI payments. Not after you have defaulted on one or more monthly payments. 

In case there is an income reduction, it must be demonstrable. You are required to submit job loss documents or letters for proof of salary reduction. In case you are a business owner and there is a decline in your revenue, you would need to submit proof to the lender. Banks need evidence of genuine distress to determine if your financial distress qualifies for loan restructuring or not. 

Some loan categories have specific windows. Personal loans might have different rules than mortgages. Check current circulars for your loan type. 

Restructured loans show on your CIBIL report. Not as defaults. But as restructured accounts. Future lenders see this. Some interpret it negatively. Others understand circumstances vary. 

Although it is better than loan default, lenders may look at it in a negative way in case you approach them for future loans. 

Here are some situations when you should consider opting for loan restructure:  

• Consistent difficulty in meeting EMIs: This is not just a single month of hardship, but a recurring issue over multiple months. The pattern of struggle is more significant than isolated incidents. 
• Significant reduction in income: A decrease of more than thirty percent in income, due to factors such as job loss or other reasons. This is a substantial reduction, not a temporary fluctuation. It signifies a long-term change in earning capacity. 
• Lack of emergency funds: If your savings are exhausted and there is no financial buffer remaining, the situation has moved from being a temporary difficulty to a more persistent financial challenge. 
• Tried other financial options: You have already cut back on discretionary spending, borrowed from family, or explored all other means of managing the situation. There is nothing more that can be optimised before considering formal assistance. 

Restructuring may not be suitable for minor cash flow issues, which can often be resolved through budgeting or temporary loans. 

You should follow these steps if you wish to restructure your loan: 

• Approach your lender: Contact the bank or financial institution holding your loan to discuss restructuring options. Provide an honest explanation of your situation. 
• Submit documentation: Lenders will require documentation to verify the financial hardship, such as income proof, tax returns, or business financial statements. 
• Evaluation: The bank will review your request and determine if restructuring is appropriate. They will assess the proposed changes to ensure they are feasible. 
• Approval and new terms: If your request is approved, the lender will provide you with the new terms of the loan. It is important to review these terms carefully before accepting. 

Some of the most common forms of EMI restructuring options are as follows: 

Tenure Extension Method 

Your five-year loan becomes seven years. Monthly EMI drops. Total interest paid increases. Trade-off between monthly comfort and long-term cost. 

Example situation. Loan of five lakhs at fourteen percent. Original five-year tenure means EMI around eleven thousand six hundred. Extend to seven years? EMI drops to around nine thousand two hundred. 

Monthly savings of two thousand four hundred. Over seven years you pay more interest overall. But monthly breathing room is immediate. 

Step-Up EMI Structures 

Start with lower EMIs. Increase gradually over time. Assumes your income recovers progressively. 

Works well for temporary setbacks. New job paying less initially but growth expected. Business recovering slowly but surely. 

Doesn't suit permanent income reduction. If recovery isn't expected, step-up creates future problems. 

Moratorium Periods 

Complete payment holiday for three to six months typically. Interest keeps accruing usually. Added to principal or spread across remaining tenure. 

Useful for acute emergencies. Medical situations. Job transition periods. Short-term cash flow crises. Not free money though. You pay eventually. Just later. With accumulated interest on top. 

It’s important to understand that loan restructuring doesn’t erase the debt. The borrower will still owe the full amount, and interest will continue to accumulate. 

Restructuring simply modifies the payment terms to make them more manageable. However, if the borrower’s financial situation is unsustainable, restructuring alone may not resolve the underlying issues. 

Before you think about restructuring, you should consider these alternatives: 

• Personal Networks: Borrowing from family or friends could be a quicker and less expensive solution. 
• Asset Liquidation: If you have valuable assets, selling them could help pay off the loan and avoid restructuring. 
• Balance transfer: If you still have good credit, transferring your loan to a lender offering better terms may be an option. 

Finnable offers personal loans from ₹50,000 to ₹10 lakh. Interest rates from 15% p.a. onwards for qualifying profiles. Might help consolidate expensive debt into something more manageable. 

Once your loan is restructured, you should consider the following options: 

Stick to Modified Terms - You should pay the new EMI amount every month till the end of the loan tenure without fail. Missing restructured payments looks worse than missing original ones. If required, you should set up auto-debit for the new amount.  

Build Buffer Simultaneously - While paying lower EMIs, save the difference. Emergency fund for future shocks. Don't treat reduced payment as spending money.  

Address Root Causes - You should work on the main causes of your financial distress, like job loss or spending habits, and address it before it leads to another situation where you end up defaulting on your loan.