Debt restructuring is basically a medium to reduce the debt of a person or a business which includes negotiating and agreeing with its lendors to reduce the debt or to revise the repayment plan with an ultimate aim to enable 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 improves.
But today the lending institutions are restructuring debt by converting the amount overdue payable into 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 which the bank was levying upon the borrower. Under such circumstances, the payout ratio of the borrowers is increasing for example, if a Borrower has borrowed original loan of Rs.100 and if he 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 contribution but also ask for additional security. This further acts as a hurdle in the way of borrowers and MSMEs are unable to accept or fulfill the requirements set by their lenders.
The borrower needs hassle free restructuring, 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 Bank can Improve Their Restructuring Process ?
The Bank should actually do the reevaluation 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 reasonable gestation period along with 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 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 to buy back such equity at a specified return on investment to the Lender/ Financial 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 borrow 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 and never pragmatic.
Remember, if the bank has better restructuring propostions, it will work better for MSMEs
DR. VISSWAS PAANSE
NPA CONSULTANTS PVT LTD
www.npaconsultant.in