Restructuring and forbearance are central tools in dealing with distressed borrowers and preventing loans from becoming non-performing. But in banking law, these concepts are not simply “being nice to the borrower.” They are legally defined, regulated processes that must follow strict accounting, supervisory, and consumer-protection rules.
This post explains restructuring and forbearance in depth, showing how modern banking law treats them, why they matter for financial stability, and what obligations they impose on lenders.
1. What Are "Restructuring" and "Forbearance"? — Legal Definitions
Although often used together, the terms have distinct legal meanings.
1.1 Restructuring
Restructuring means modifying the original contract to make repayment more viable.
Typical changes include:
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extending the loan maturity;
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reducing the interest rate;
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converting short-term debt to long-term debt;
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changing amortisation schedules;
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granting grace periods (capital moratorium);
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partial debt forgiveness;
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converting debt into equity (corporate borrowers).
Restructuring generally requires:
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a new contractual agreement,
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clear disclosure of terms,
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compliance with consumer-credit and fair-treatment rules.
1.2 Forbearance
Forbearance refers to temporary concessions granted due to the borrower’s financial difficulty.
It is not always a full restructuring. It can be:
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temporary payment holidays,
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allowing interest-only payments,
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suspending enforcement,
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delaying instalments,
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waiving late fees.
Forbearance is usually:
In legal terms, forbearance is a risk-management tool, not a sign of normal performance.
2. Why Restructuring and Forbearance Matter in Banking Law
2.1 Preventing Loans from Becoming NPLs
Early and well-structured concessions can prevent the loan from falling into non-performing loan (NPL) status.
But regulators warn that:
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excessive forbearance can artificially suppress NPL figures,
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concessions must reflect true borrower viability,
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misclassification is a regulatory breach.
2.2 Protecting Borrowers in Financial Difficulty
Consumer-credit law requires lenders to:
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act fairly,
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assess affordability,
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communicate transparently,
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not pressure borrowers with aggressive collection,
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consider reasonable forbearance before enforcing.
Many countries now impose “treating customers in financial difficulty fairly” as a legal rule.
2.3 Maintaining Financial Stability
Restructuring reduces systemic risk:
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banks avoid sudden spikes in NPL ratios,
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companies have time to recover and avoid insolvency,
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households avoid foreclosure,
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regulators maintain confidence in banking systems.
Poor restructuring frameworks contributed to financial crises in:
3. Legal Frameworks Governing Restructuring and Forbearance
Different jurisdictions have different frameworks, but modern banking law often includes these common pillars:
3.1 Supervisory Guidelines
Europe (EBA / ECB SSM)
The most detailed framework globally:
They define:
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indicators of borrower distress,
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criteria for forbearance recognition,
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when a restructured loan is considered performing again,
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data-tracking and reporting duties.
United States
Restructuring is governed by:
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Troubled Debt Restructuring (TDR) rules,
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Federal Reserve / OCC supervisory manuals,
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CECL provisioning (expected credit losses).
International (Basel)
Basel standards require:
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classification of “restructured exposures”,
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higher provisions for distressed loans,
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rigorous borrower viability assessments.
3.2 Consumer Credit Regulation
Lenders must follow rules on:
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disclosure of new terms,
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unfair contract terms,
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responsible lending,
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hardship variations (Australia, UK, Canada),
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specific foreclosure-prevention statutes (US mortgage law).
Many jurisdictions legally require:
3.3 Insolvency and Corporate Rescue Law
For businesses, restructuring interacts with:
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pre-insolvency procedures (e.g., UK Company Voluntary Arrangements),
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Chapter 11 in the US (debtor-in-possession),
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EU Preventive Restructuring Directive.
Banks must avoid:
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granting concessions that breach pari passu rules,
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violating insolvency preferences,
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giving new credit without adequate security.
4. Banking Law Requirements for Granting Forbearance
Forbearance is not discretionary kindness. Banks must follow strict procedures.
4.1 Borrower Viability Assessment
Before granting concessions, banks must analyse:
“Viability first” is a legal principle.
4.2 Specific Documentation and Approval
Banks must document:
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reason for the concession,
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financial difficulty of the borrower,
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expected repayment capacity,
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supervisory compliance.
Many regulators require approval by a credit committee and periodic review.
4.3 Provisioning and Accounting Obligations
Under IFRS 9 and CECL, restructuring often triggers:
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classification into “Stage 2” or “Stage 3”,
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increased credit-loss provisions,
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recalculation of expected credit losses,
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impairment disclosures in financial statements.
A loan does not become performing again until the borrower shows sustained performance.
4.4 Reporting Duties
Regulators require:
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accurate reporting of forborne exposures,
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tracking the “cure period” after restructuring,
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data on repeated forbearance (a red flag),
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transparency in stress-testing scenarios.
Failure to correctly report is considered a supervisory breach.
5. Types of Loan Restructuring
There are three main restructuring categories in banking law:
5.1 Contractual Restructuring
Modifying the loan contract by:
Typically used for consumer loans or mortgages.
5.2 Operational Restructuring (Corporate Borrowers)
Involves:
Banks often require borrowers to submit:
5.3 Financial Restructuring
More sophisticated tools:
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converting debt to equity,
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subordinating part of the debt,
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debt swaps,
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partial forgiveness combined with warrants or share options.
Used with large corporates or distressed SMEs.
6. The “Cure Period” — When a Restructured Loan Becomes Performing Again
Regulators impose a “probation period” or cure period, typically:
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12 months of regular payments,
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no more than 30 days past due,
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positive viability assessment,
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no reliance on further concessions.
If these conditions are met, the loan can be reclassified from:
Forborne → Performing.
If not, it remains:
Forborne → Non-Performing.
7. Risks and Legal Pitfalls for Banks
1. “Evergreening”
Granting concessions only to avoid NPL classification — prohibited.
2. Misclassification
Incorrectly categorising forbearance as normal performance — leads to supervisory sanctions.
3. Consumer-law breaches
Failure to treat borrowers fairly can result in:
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fines,
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compensation orders,
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unenforceable terms,
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reputational damage.
4. Violating insolvency law
Improper restructuring may:
5. Underprovisioning
Failing to create adequate provisions is an accounting and regulatory breach.
8. The Economic and Social Role of Restructuring
Restructuring is crucial because it:
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prevents unnecessary foreclosures,
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keeps viable businesses alive,
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reduces NPL stock,
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protects consumers from financial ruin,
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stabilises financial systems,
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supports economic recovery during crises (e.g., COVID-19 moratoria).
Modern banking law sees restructuring as a macro-prudential tool, not just a private contract modification.
Conclusion
Restructuring and forbearance today are highly regulated, legally structured mechanisms designed to balance:
They require strict compliance with supervisory guidelines, accounting standards, and consumer-credit regulation.
Understanding these processes is essential for anyone studying banking law, credit risk, or financial regulation, because they represent the bridge between distressed borrowers and the safety of the entire banking system.
