Loan Restructuring Explained: When It Helps And What To Watch Out For

Loan restructuring is a financial mechanism designed to help borrowers manage repayment difficulties without defaulting. Instead of cancelling the loan, restructuring modifies its terms to make repayments more manageable. This can include extending the loan tenure, reducing monthly EMIs, lowering interest rates, or altering repayment schedules.  

Key Highlights  

• Loan restructuring does not erase debt but eases repayment pressure  
• Helps during temporary financial setbacks such as job loss, medical emergencies, or business downturns  
• Common methods include extending tenure, reducing EMIs, or revising repayment schedules  
• Restructuring increases total interest paid over time due to longer repayment periods  
• Impacts credit scores, though less severely than outright default  
• Best suited for borrowers expecting recovery in income or cash flow within a reasonable timeframe  

Strategic Impact  
Restructuring provides breathing space for borrowers under financial stress, preventing defaults and maintaining lender relationships. It is particularly useful during short-term disruptions, such as economic downturns or personal emergencies, where repayment capacity is temporarily reduced.  

However, it is not a permanent solution for chronic income loss. Borrowers must weigh the trade-off between immediate relief and higher long-term costs. Early communication with banks is crucial, as proactive restructuring can prevent deeper credit damage.  

For lenders, restructuring helps preserve loan books and reduces non-performing assets, while offering borrowers a chance to stabilize finances.  

Sources: Moneycontrol, Mint, Bajaj Finserv