Credit Restructuring: Definition, Types, Conditions, and Examples 

Credit restructuring is a solution that can be mutually agreed upon between creditors and debtors. This solution was taken to reduce the burden of credit installments and enable debtors to pay off their debt burden. 

Several factors can make debtors experience problems in paying off their credit installments. The causes are a significant reduction of the main source of income, a heavy debt burden, and the burden of the cost of living. Unpredictable external factors such as falling ill and sudden health care costs can also contribute to the problem. These constraints were then considered in the restructuring process. 

In this process, the two parties will discuss how the ongoing debt can be settled. The methods taken can be in the form of reducing interest rates, providing an extension of time for payments, and reducing the principal amount of debt. 

Before a credit restructuring is agreed upon, it is necessary to carry out careful financial analysis. With this analysis, both parties now have a solution to the credit problem. 

Definition 

Credit restructuring is a mechanism to change the terms originally set by the creditor to the debtor. The agreement in these provisions can change over time which results in delays in the settlement process due to several factors. Once the credit is finally experiencing a delay in payment, this situation needs to be discussed to change the terms so that the debtor can pay off the debt. 

Simply put, can be explained as an effort to help debtors fulfill their obligations to pay off installments. In this mechanism, the debtor must submit a proposal and provide detailed information on the reasons for not being able to fulfill their obligations, especially when the financial situation is unstable or even experiencing a significant decline. 

Information received by creditors is then reviewed and analyzed. If it is deemed necessary to restructure, the creditor enters into a new agreement or agreement between the two parties that stipulates how the principal debt will be repaid. When the agreement has been approved with the new rules, the debtor must return to pay the debt with a new time timeframe or nominal that has been determined. 

Read Also: How to Make a Credit Scoring Model and its Examples

Types 

In credit restructuring, there are several provisions that creditors feel are appropriate to apply to debtors through credit analysis. These provisions can be recognized by their types. The following are types of credit restructuring that can be agreed upon between creditors and debtors: 

1 . Decreasing the Interest 

The type of restructuring generally implemented in the new credit provisions is to apply a reduction in interest rates so that it is easier for debtors to make repayments. The lowered interest rate also has a certain time limit according to the conditions set by the creditor. After the stipulated timeframe has passed, the interest rate will return to normal according to the agreement at the beginning. 

2 . Extending Time 

An extension of time is one of the agreements between the creditor and the debtor if a credit problem occurs. Typically, these agreements lead to delays in payments. The timeframe can be set to monthly or yearly according to the agreement between the two parties. This type of restructuring can help to get back on track financially and temporarily reduce costs. 

3 . Reducing the Interest Arrears

Reduction of interest arrears is a mechanism to reduce the amount of interest that must be paid by debtors on problem loans. Credit installments may not be able to be paid on time due to cost constraints and other factors causing interest arrears to soar. Creditors can reduce or even eliminate interest arrears as part of efforts to restructure credit so that debt settlement continues. 

4 . Decreasing the Credit Arrears

This type of restructuring is an action by the creditor against the debtor for credit problems. Reducing the amount of principal arrears can be followed by reducing or eliminating interest rates. This method is useful so that payments made are more affordable. 

5 . Increasing the Credit or Payment Facilities

The addition of credit or financing facilities aims to help reduce the debt burden and strengthen the debtor’s finances. The addition of this facility is done in the form of increasing the amount of credit to pay off debts or financing new projects and businesses. This step is expected to increase capital and debt payments can be fulfilled. 

6 . Converting Credits into Temporary Equity Equation

This type of restructuring usually occurs between creditors and debtors from a company, organization, or legal institution. Both parties will agree to convert credit or convert debt into equity or invest in a business with the hope that the credit conversion will generate another source of funds in the long term. 

Read Also: What is the Difference between Credit and Financing?

Conditions and How to Apply for a Restructuring 

Before applying for a credit restructuring, several conditions must be met according to the rules issued by Bank Indonesia in BI regulation No. 14/15/PBI/2012 Article 52. The regulation states that debtors who experience difficulties in paying loan principal and/or interest and still have good business prospects are considered capable of fulfilling their obligations after the credit is restructured. 

If all of these conditions are met, the debtor can apply for a credit restructuring. When applying, there are several ways which include: 

1 . Submit the Restructuring Request Proposal 

An application can be made by visiting a financial institution directly with an application proposal. All the required information should already be available. Then, the applicant must divulge all the obstacles faced in detail and the reasons for proposing a credit restructuring. This information will be received by the financial institution and the debtor must carry out the relevant administrative procedures for applying. 

2 . Restructuring Worthiness

The eligibility check carried out on the applicant is to evaluate the ability to pay, credit history, type of credit, credit period, and credit amount. These factors are needed for considering whether credit restructuring is necessary or not. If the application is accepted, the creditor will conduct a credit analysis to determine the type of restructuring that is appropriate to the debtor’s credit problems. 

3 . Briefing of the Creditor’s Assessment Results

After going through several assessment processes, the creditor will inform about the approval or rejection of the credit restructuring application. Usually, these results are presented through an appointed representative to inform the debtor in person or online. 

Read Also: How to Solve Bad Credit and Its Examples

Examples 

To understand how to register for a credit restructuring, let’s run a simulation! 

In this case study, a debtor has a loan of IDR 100 million with a repayment period of 5 years and an interest of 10% per year. 

When assessing the amount of credit and the term and interest per year, the creditor will provide three options that are considered suitable for the background of the creditor:  

• Debtors can extend the term to 7 years with a fixed interest rate of 10% per year. 
• The debtor can reduce the interest rate to 8% per year with a fixed term of 5 years, but the monthly installments are IDR 2,070,000. 
• Creditors offer a delay in paying the principal for 6 months with a fixed repayment period of 5 years, a fixed interest rate of 10%, and monthly installments of up to IDR 2,125,000. 

Of the three options, the first offer is considered more suitable and in accordance with the debtor’s financial condition. Then it was agreed that the initial credit amount was IDR 100 million with an initial interest rate of 10%, the initial payment term was 5 years and the initial monthly installments of IDR 2,124,000 were converted into monthly installments of IDR 1,350,000 for 7 years, and interest rate is fixed at 10% after credit restructuring. 

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