Indian economic development depends heavily on Micro, Small, and Medium Enterprises (MSMEs) because they provide major employment opportunities and produce significant GDP value.
The combination of market volatility and unforeseen disruptions, such as the event of COVID-19 pandemic, results in MSMEs being overwhelmed by multiple loans. Along with that, unstable repayment systems create serious financial challenges for their operations.
Business loan restructuring stands as a strategic lifeline that provides both temporary relief and enduring sustainability in such business situations. There are DSA partner through which one can get the ideas of the lenders and the rate of interest they are charging for the loan products.
- The Nature of Business Loan Restructuring
Loan restructuring represents changes made to current loan agreement terms, which aim to assist borrowers in handling their payment obligations. The debt relief program includes options such as longer payment duration and lower rates, or substituting overdue interest with new term loans, as well as implementing payment pauses.
The Reserve Bank of India (RBI) established several one-time and targeted frameworks for distressed borrowers from MSMEs following its announcement regarding loan restructuring in India. The process of restructuring banks through approval by the RBI stands as a legitimate method to reduce financial strain and continues to show on bank books without defaulting.
- Why MSMEs Might Need Loan Restructuring?
Because their profit numbers are small, most MSMEs need to borrow money from external sources to support their working capital needs, purchase machinery, and fund logistics and vendors. When revenue drops unexpectedly or operational issues arise, MSMEs start facing cash flow problems. The need for MSME restructuring arises from various standard causes, which include:
- Reduced sales due to seasonal or pandemic-related factors
- MSMEs use several financial institutions to obtain loans with high interest rates
- Delays in payment from clients and government contracts
- The business faces elevated operational costs from increased labor and fuel expenses and transportation charges.
- MSMEs generally cannot refinance because of bad credit performance.
Through restructuring, MSMEs gain the chance to unite their debts while stopping legal pursuits and enhancing their financial flow.
- Guidelines of RBI on MSME Loan Restructuring
The RBI developed multiple restructuring schemes which defend both MSMEs and the credit system.
- RBI’s On-Time Restructuring Framework (2020): Standard accounts facing stress due to COVID-19 became the target of this program.
- Restructuring Framework for MSMEs (Revised 2021): The scheme applies to all accounts designated ‘Standard’ when March 31, 2021 arrived.
- Resolution Framework 2.0: This initiative serves small organizations with a maximum exposure amount of ₹50 crore.
A successful loan restructuring by lenders allows borrowers to stay out of NPA status as long as they follow RBI regulatory requirements. The credit score remains unaffected or minimally damaged through these measures.
- Process of Consolidating Multiple Loans
The main problem that MSMEs must handle involves controlling multiple business loans that carry different repayment schedules and distinct interest rates together with unique conditions. The efficient consolidation and closing process works through restructuring as follows:
- Contact a Single Lender With a Consolidated Approach
When seeking business consolidation, minimum exposure must be directed to the financial institution that handles most of your operations. Businesses wishing to restructure existing loan accounts must propose merging every account into one term loan or cash credit facility. Administrative simplicity decreases while giving creditors one monthly repayment.
- Change the Overdue Loans With Structured Terms
Loan holders can ask their lenders to create term loans with affordable EMIs from outstanding interest payments and late payments. Regularizing the account status becomes possible through this approach as default classification risks are eliminated.
- Negotiate for Low EMI and Longer Tenure
A 5-7-year extension of your business loan payment enables a major decrease in monthly EMI charges. Excessive debt can successfully move through timelines without disrupting operational reserves because of this time allowance. Here, one can get in touch with a personal loan agent, which can help the individual get a long tenure for the loan repayment.
- Request for Moratorium Period
The establishment of a moratorium between 3 to 6 months enables MSMEs to maintain operational stability by postponing their payment obligations. The account owner still accrues interest payments throughout this era of grace.
These are some of the processes through which one can increase the loan tenure and restructure the process of loan tenure.
