In times of financial stress—whether due to job loss, reduced income, or unexpected events like a pandemic—repaying loans can become challenging. That’s where loan restructuring becomes a crucial lifeline. But what exactly is loan restructuring, and how does the process work?
In this guide, we explain the loan restructuring process step by step, including eligibility, documentation, benefits, and potential drawbacks.
What is Loan Restructuring?
Loan restructuring is a formal process where a lender modifies the terms of an existing loan to make repayment easier for the borrower. The goal is to avoid defaults and help borrowers manage temporary financial difficulties.
Loan restructuring can involve:
- Extending the loan tenure
- Reducing the interest rate
- Offering a temporary moratorium (repayment pause)
- Converting unpaid dues into a new loan
When Should You Consider Loan Restructuring?
You should consider restructuring your loan if:
- You are facing financial hardship due to a job loss, medical emergency, or business downturn.
- You expect to recover financially within a reasonable timeframe.
- You want to avoid defaulting and hurting your credit score.
Note: Loan restructuring is not debt forgiveness—it’s an adjustment, not a waiver.
Eligibility Criteria for Loan Restructuring
Lenders typically evaluate several factors to determine if you’re eligible for loan restructuring:
| Criteria | Details |
|---|---|
| Nature of Financial Distress | Must be genuine and verifiable |
| Loan Repayment History | Clean repayment record prior to hardship |
| Type of Loan | Home, personal, business, or auto loan |
| Loan Age | Usually not a newly disbursed loan |
| Borrower Category | Salaried, self-employed, MSMEs, etc. |
Each lender may have its own specific criteria and internal policies.
Documents Required for Loan Restructuring
The lender may ask you to submit the following documents:
- Loan account statement
- Income proof (salary slips, bank statements, ITR)
- Latest credit report
- Letter explaining financial hardship
- Medical bills or termination letter (if applicable)
- Business loss documents (for entrepreneurs)
Step-by-Step Loan Restructuring Process
Here’s how the loan restructuring process typically works:
1. Initiate the Request
Contact your lender (bank or NBFC) and formally request loan restructuring. This can often be done via:
- Online portal
- Email/phone
- In-person branch visit
2. Submit the Application and Documents
Fill in the restructuring request form and attach all required documents. Be honest and detailed about your financial situation.
3. Assessment by the Lender
The lender will assess:
- Your financial situation
- Viability of restructuring
- Risk involved
This may include credit checks and internal audits.
4. Offer of Restructuring Terms
If approved, the lender will propose new repayment terms, such as:
- Lower EMIs
- Extended tenure
- Interest-only payment for a few months
5. Signing of Restructuring Agreement
Once you agree to the terms, you’ll sign a formal agreement. Some lenders may charge a nominal fee for this.
6. Implementation of New Terms
The new terms are applied to your account, and you begin repayments as per the revised schedule.
Example: Loan Restructuring Scenario
| Original Loan | Restructured Loan |
|---|---|
| ₹10 lakh home loan | ₹10 lakh (unchanged principal) |
| Interest: 9% for 10 years | Interest: 8.5% for 15 years |
| EMI: ₹12,668 | EMI: ₹9,847 |
| Benefit: ₹2,821/month saved | Longer term but easier repayment |
Pros and Cons of Loan Restructuring
✅ Benefits
- Avoids loan default and credit score damage
- Gives financial breathing room
- Can reduce EMIs or provide a repayment pause
- No need for a new loan application
❌ Drawbacks
- Extended tenure = more total interest paid
- May impact your credit report as “restructured”
- Some lenders charge processing or restructuring fees
- Can affect future loan eligibility
Will Restructuring Affect My Credit Score?
Yes, but not always negatively.
Loan restructuring is often reported to credit bureaus. While it’s not as damaging as a default, it may indicate financial stress and impact your creditworthiness slightly. Future lenders might ask for an explanation when you apply for a new loan.
However, defaulting is far worse than opting for restructuring.
RBI Guidelines on Loan Restructuring (India)
The Reserve Bank of India (RBI) has introduced frameworks like:
- Resolution Framework 1.0 & 2.0 (for COVID-19)
- One-time restructuring for personal and MSME loans
These frameworks help ensure fair and standardized treatment across banks.
Tips Before Opting for Loan Restructuring
- Evaluate your financial recovery plan
- Compare with other options like top-up loans or balance transfer
- Ask the lender about all charges, risks, and credit score implications
- Get the new repayment schedule in writing
- Consult a financial advisor, if needed
Final Thoughts
Loan restructuring can be a valuable relief option during financial hardship—but it should be used wisely. It’s not a free pass, but rather a second chance to stay on track and avoid defaulting. Always read the fine print and choose the option that aligns best with your long-term financial goals.
FAQs:
Q1. Can all types of loans be restructured?
Most loans like personal, home, auto, and business loans can be considered. However, credit card dues and unsecured loans may be less flexible.
Q2. Is restructuring the same as loan settlement?
No. Restructuring adjusts terms; settlement involves paying a reduced amount, which severely affects your credit score.
Q3. How long does the restructuring process take?
Typically 7–30 days, depending on the lender and case complexity.