Debt restructuring can be a lifesaver for borrowers who are struggling to service their debts. In this, the creditor consents to changes in the terms of the debt agreement so that the debt becomes more affordable. The process can be undertaken through a modification of the loan repayment period or lowering the interest rate, and so on.
Debt restructuring is a choice used by firms and individuals for npa management. Debt restructuring can be negotiated with the creditor by agreeing to a lower interest rate. It is for the benefit of both the lender and the borrower. If the borrower is in financial trouble and cannot meet debt obligations with the present terms, then the restructuring of debt is a less expensive alternative.
Restructuring is a part of npa debt settlement process.
Debt restructuring serves various vital purposes:
- It helps in implementing a time-bound and transparent debt restructuring plan to help borrowers that are facing financial distress.
- It minimizes the losses for shareholders and lenders.
- It enables firms that are in distress by helping them stay afloat in the best interests of every stakeholder in the firm, the creditor, and the shareholder.
How does Debt Restructuring Work?
Debt restructuring is a way of performing npa management. The steps involved in debt restructuring are:
Contact the Lender
Debt restructuring is the lender’s response to a borrower that is finding it difficult to service debt. It is best to contact the creditor as soon as the lender realizes that he will not be able to meet the debt repayment schedule.
Wait for the response by the lender
Once you have informed the lender about the delay in the repayment schedule, you have to wait for their response. Remember, a lender is not obliged to come to your help. In case of long-pending repayments, he might have started the npa debt settlement process.
Compare the alternatives
If the lender agrees to provide you interim assistance to tide you over temporary financial difficulties or he offers a debt restructuring plan, you need to compare the alternatives. There could be many options in both these choices.
Negotiate
It is important to negotiate your new contract to arrive at mutually agreeable terms. Before you agree to any new terms for debt repayment.
Finalize the new terms/p>
Once the new terms have been agreed upon, you need to formally sign the revised agreement with the revised terms. These new terms become binding on you for debt repayment.
Some Methods for Debt Restructuring are
- Debt-for-Equity Swap
- Bondholder Haircut.
- Renegotiating the Terms for Repayment
- Debt Consolidation
- Payment Deferment.