Debt Restructuring

Debt Restructuring

Debt restructuring is a very tricky and intensive exercise.

Debt restructuring has primarily four parts.
Debt Analysis, strategy for business turnaround, repayment planning and negotiation.

The creditors(in this case it will be mostly bankers) may be willing to restructure the credits, if the Debtor had earned a decent reputation in the past and recent situation could be well explained.
In the case of those who had not earned a reputation with their creditors earlier, the handling will be tougher, and longer too.

More over the process of restructuring has to be with a clear workable strategy for business turnaround, without which the whole process will be temporary, and unacceptable by the creditor.
After all, the creditor has to firmly believe that the restructuring is not just to buy time alone, but to clear the debt.

Federation of Idian Micro and Small & Medium Enterprises (FISME) says that it is a rare case to see Indian banks taking up Debt Restructuring for MSMEs.
“Due to the unsympathetic stance of most of the banks, critical time is wasted and most of the units, which could have been saved with quick debt restructuring, unfortunately descend into NPAs,” adds the association.

This can be changed with religious and sincere followups with the bankers, but in any case, it won't be a cake walk to make the bankers accepting into this, unless they are fully convinced of the viability.

Debt Restructuring Mechanism
Most of the banks in India usually use the technique of debt restructuring for recovering loans from MSME defaulters. The RBI has structured a debt restructuring mechanism for all finance lending institutions in India and help potentially viable entities that are facing problems.
Debt restructuring means giving the MSME sector more time for repaying their debt. Suppose an enterprise has to repay its loan in three years, but the unit is unable to repay it on account of less earning or no earnings. So, banks will give more time to the firm to repay the loan amount to them”

Banks are trying to curb irregularities by SMEs. Under the debt restructuring mechanism, banks extend the repayment period for Term-Loan possibly for three years at zero interest rates. The Working Capital Term-Loan extension is provided for five-year period. Moreover, in the debt restructuring process, Public sector Banks(mainly SBI) provide loans for SMEs at below base rates.

Debt restructuring will be effective only with improved performance resulting in higher revenue, and may need a deeper study of the business on the whole!!!