In India, bad debt on loans is mounting. In fact, bad debts in the banking sector have reached alarming proportions and banks are facing some of the most challenging times in handling bad debts.
You can increasingly hear banks either engaging in debt restructuring talks or refinancing loans, especially for customers from the power, steel and infra sector in India. In fact, according to statistics restructured debt in India, increased 100 per cent between 2011 and 2014.
Let us now understand what is debt restructuring
A debt restructuring would involve a whole lot of things, including conversion of debt to equity, increasing the loan payment terms or probably even reducing interest rates. All this is done when there is mounting debt on a corporate and it is unable to pay the same.
Recently, the Reserve Bank of India allowed banks to convert loans to equity, considering the mounting of bad loans in the system. All lenders can now own a majority stake in the company through this process. This is one mechanism in which debt restructuring takes place,
In another way the concerned bank or the financial institution may call the debt and completely refinance the same with a lower interest rate or other terms, including extension of payment.
However, banks and financial institutions should be careful in ensuring that debt restructuring does not take place in such away so as to mask bad debts of the institution.
Restructuring allows banks the opportunity to free up more money for lending as the same is not categorized as a bad debt. This is because provisioning at the bank is reduced.
Therefore, a bank should not take advantage and keep restructuring bad assets, so as to reduce the provisioning.