To Owe, or, Not to Owe
The lending sector today is extremely skewed in favour of the rich and famous. If a middle class borrower whose borrowings rarely exceed Rs. 1 crore defaults on his payment the lending institutions use all their clout to try and recover the amount due and burden the borrower with all sorts of legal damages, at the same time when it comes to the multi-crore tycoons defaulting they follow the tune of these tycoons like rats following the pied piper. At the same time it the blame cannot be completely placed on the lenders themselves as they are, but, trying to save themselves from prolonged court battles where they would need to spend exorbitant amount of legal fees while having no guarantee of recovering the dues. Let us now take a look at the way in which the lenders seek to recover at least a fair percentage of their dues from the defaulting big-wigs. This process is commonly referred to as ‘debt restructuring.’ Investopedia defines debt restructuring as follows,
The reorganization of a company’s outstanding obligations, often achieved by reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. This allows a company to increase its ability to meet the obligations. Also, some of the debt may be forgiven by creditors in exchange for an equity position in the company.
In what way do the lenders benefit from these arrangements?? Well, for starters instead of the entire amount due becoming non-recoverable they are able to obtain an undertaking of repayment from the borrower after decreasing the interest rate and increasing the term of the loan. further in some cases the borrower offers the lender equity participation(and in some cases a director representing the lender is also appointed) in the company in exchange for a portion of the loan thereby ensuring that the lender shall have reasonable means to secure his interest in the entity. Another major benefit accruing to the lender is that the legal recourse need not be resorted to, to recover the dues thereby avoiding protracted court battles and the resultant legal expenses.
The borrower too gains from this sort of an arrangement as he has a longer time to turnaround the business and repay the loan and the reduced interest rates would increase his debt servicing capability. Further legal expense to defend bankruptcy suits need not be incurred thereby ensuring that a greater amount of earnings can be re-invested to turnaround the business.
All said and done debt restructuring is not as simple as it seems and involves a lot of paperwork and documentation apart from a sound understanding of the Reserve Bank of India guidelines and laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002 (SARFAESI), therefore it would always be advisable to consult a professional before going about the same.