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Debt restructuring is basically a medium to reduce the debt of a person or a business, which includes negotiating and agreeing with its lenders to reduce the debt or to revise the repayment plan with the ultimate aim of enabling the borrower to meet his revised payment obligations. With a debt restructuring, the organization’s chances of paying back its obligations and staying in business greatly improve.

But today, lending institutions are restructuring debt by converting the overdue amount into a WCTL (working capital term loan).

In such cases, most of the time, the rate of interest under WCTL is higher than the initial rate of interest that the bank was levying on the borrower. Under such circumstances, the payout ratio of the borrowers is increasing. For example, if a borrower has borrowed an original loan of Rs. 100 and is paying Rs. 10 interest, after restructuring, it will increase to Rs.11 or Rs.12. The question here is that if he is not able to pay Rs.10 how could he serve Rs.11 or Rs.12 ? So, borrowers are shying away from restructuring.

At the time of restructuring banks demand 10% to 20% as additional promoter’s contribution which MSMEs are unable to contribute.

The lending institutions not only ask for additional contributions but also ask for additional security. This further acts as a hurdle for borrowers, and MSMEs are unable to accept or fulfill the requirements set by their lenders.

The borrower needs hassle free restructuring, a haircut, & sufficient gestation period after restructuring, but unfortunately, they do not get any of these.

There is no haircut in the restructuring process, which means that a portion of the outstanding interest payment does not get written off.

How can banks improve their restructuring process?

The bank should actually do a revaluation of the repayment capacity of the borrower and accordingly decide the restructuring and repayment schedule.

They can work out a ballooning repayment schedule, or it could be a combination of a reasonable gestation period along with a ballooning repayment schedule.

The Bank should look at the recovery of the restructured debt in 2 ways:

a) Offer short gestation period for recovery of principal debt recoverable over longer period of time, either with EMI or ballooning pattern.

b) Offer longer gestation period for recovery of overdue interest amount recoverable in 3 to 5 years. It has to be noted that the break-even point is kept reasonably low, whereby the MSME should be able to service the loan and also earn profit for themselves and should not become unpaid slaves of the lending institutions or the Banks. Alternately, a certain portion of the restructured debt may be converted into Equity with personal obligation of MSME promoter to buy back after certain period.

The Bottom line is survival of business, serviceability of the loan and enriching the MSME promoter, making him capable of buy back such equity at a specified return on investment to the lender or Institution.

Bank has to do real restructuring by

1. Considering the viability of the project.

2. Considering the actual repayment capacity of the project.

3. Avoid asking for an additional contribution.

4. Avoid asking for additional collateral securities.

5. Offer long term repayment period of 10–15 years, as offered in case of housing loans, which will bring down their BEP.

If these little aspects are thought upon and implemented, perhaps restructuring can be successfully worked out in the interest of the lending institutions as well as for the borrowers.

Conclusion:

If bankers are only looking from their recovery point of view and not from the survival and revival point of the borrower, then banks will definitely succeed in window dressing its books by offering and sanctioning non-workable restructuring of loan to borrowers who try to accept such sanction under despair and with hope of borrowing the time, to avoid harassment, and not being classified as Non-Performing Asset.

More than 90% of restructured plans have eventually failed within the span of 1 year because the restructuring plans were never practical or pragmatic.

There has been a lot of focus on Non Performing Assets or NPA in India. Gone are the days when people used to borrow huge amounts of money in the name of business expansion and escape without repaying them. Today, NPA control and NPA Management are the key activities carried out by banks and financial institutions. There is a close check on the borrowers, regular payers, and defaulters.

As per the guidelines and norms given by the Reserve Bank of India, there has been a significant improvement in the process of recognizing and provisioning weak assets.

When a company or individual fails to pay up, due to whatever reason, things go wrong on the financial institution’s part. Sometimes, the reason behind non-payment is genuine and real. But sometimes, it is just intentional and deliberate.

Despite having the capability of repaying the loan, they do not pay. Such an act is called a willful default. Getting money recovered from such defaulters would be very difficult. Sometimes, it involves a very long battle.

But the question is: how is a company or individual declared a ‘willful defaulter’?  What is its impact on NPA management?

Let’s understand it quickly.

When is a defaulter termed a “willful defaulter”?

As per the guidelines given by the Reserve Bank of India, a defaulter can be declared a “willful defaulter” under these circumstances:

When the default is done by the borrower (individual or company), it doesn’t honor the obligations, even when there is a capacity for repayment. It is a deliberate, intentional non-payment.

The borrower doesn’t utilize the borrowed money for the specific purpose for which it was obtained. He diverts the same for some other purpose.

When the borrower siphons off the funds and doesn’t use the money for the specific purpose for which it was used. Also, there are no assets available to justify the fund usage.

When the borrower sells off the assets bought by the borrowed funds without the knowledge of the financial institution or bank.

When the guarantee or letter of comfort given by the group company is not honored when invoked by the lender, it will also be a case of willful default.