Loan Rescheduling Facility: SMEs Push for Extension Amid High Borrowing Costs
In many economies, small and medium enterprises (SMEs) are the backbone of growth, employment, and innovation. However, with borrowing costs climbing to record highs, many of these businesses are now under financial pressure. As a result, SMEs are urging regulators and banks to extend the loan rescheduling facility, hoping for temporary relief to survive and stabilize their operations.The recent surge in borrowing costs has placed enormous stress on small and medium enterprises across many countries. Inflationary pressures, currency depreciation, and tighter monetary policies have all contributed to higher interest rates. For SMEs already operating with tight cash flows, these rising costs are proving difficult to manage.Many business owners now seek an extension of the loan rescheduling facility, which would allow them to restructure debt and reduce monthly payment obligations — providing a lifeline during turbulent financial times.
The Challenge: Rising Borrowing Costs for SMEs
Interest Rates and Limited Access to Capital
SMEs generally face higher lending rates than large corporations because banks consider them riskier borrowers. In some markets, SME loans carry interest rates between 17% and 18%, which significantly increases financial strain. Unlike big firms, smaller enterprises do not have easy access to low-cost financing or capital markets.
Cash Flow and Operational Pressure
High interest rates directly affect working capital. SMEs often depend on short-term loans to cover operational costs like wages, raw materials, and rent. As the cost of borrowing rises, the repayment burden grows heavier, leaving little room for investment or business expansion.
External Economic Challenges
Rising inflation, increased import costs, and slower demand in some sectors have worsened the financial stress. Many SMEs insist that their difficulties are the result of global and domestic factors beyond their control — making loan rescheduling essential for survival.
What Is Loan Rescheduling and Why It Helps
Loan rescheduling means modifying the repayment structure of an existing loan. It allows borrowers to extend the loan tenure, reduce installment amounts, or get a temporary grace period. This financial flexibility can be vital for businesses recovering from economic shocks.
Key Features of Loan Rescheduling
- Extended Repayment Period: Borrowers get more time to pay back loans.
- Grace Periods: Temporary suspension or reduction of payments for a set time.
- Reduced Down Payment: Lower upfront requirements for eligibility.
- Interest Adjustment: Sometimes, the rescheduled loans carry slightly lower interest rates.
Why It Benefits SMEs
Loan rescheduling offers breathing room for companies struggling to manage debt during tough economic periods. It helps prevent defaults, keeps businesses running, and protects jobs — all without harming the long-term relationship between banks and borrowers.
Why SMEs Want Extension of the Facility
Missed Deadlines for Application
Many SMEs were unable to apply for rescheduling within the original timeframe due to lack of awareness or financial readiness. They now want an extension so that more eligible businesses can participate.
High Costs Continue
Even those who rescheduled earlier say that the continued rise in borrowing costs has made repayment difficult again. An extended facility would provide additional relief and reduce the chance of future loan defaults.
Unequal Access Between Large and Small Firms
SME owners often claim that larger corporations receive more lenient treatment from banks. They are now demanding equal opportunities to restructure debt, arguing that their smaller scale should not mean fewer financial protections.
Administrative Delays
Many banks have been slow to process rescheduling applications. Extending the facility would allow lenders to clear the backlog and process SME cases more efficiently.
Risks and Concerns of Prolonged Rescheduling
While extending rescheduling facilities can support struggling businesses, it also brings risks that must be managed carefully.
Erosion of Credit Discipline
If rescheduling becomes too frequent, some borrowers might delay payments deliberately, expecting new concessions later. This weakens the overall repayment culture.
Non-Performing Loans (NPLs)
Statistics show that a large share of previously rescheduled loans tend to turn bad again. This increases non-performing loans and reduces financial stability within the banking sector.
Burden on Banks
Extended repayment timelines and lower interest rates can reduce banks’ income and tie up their liquidity, affecting their ability to lend to new borrowers.
Moral Hazard
Some borrowers might misuse rescheduling facilities even when they are financially capable of repaying, creating unfair advantages and losses for responsible borrowers.
How Policymakers Could Design a Balanced Extension
Policymakers can design a balanced and responsible rescheduling extension that supports SMEs while maintaining financial discipline.
| Policy Element | Suggested Approach | Expected Outcome |
|---|---|---|
| Extended Timeframe | Allow an additional 6–12 months for applications | Gives SMEs more time to qualify |
| Limit on Repetitions | Restrict rescheduling to one or two times | Prevents abuse of the system |
| Tiered Eligibility | Different rules for small, medium, and large borrowers | Speeds up processing |
| Partial Down Payment | Require a small upfront payment (around 2%) | Ensures borrower commitment |
| Grace Period | Offer up to 2 years for recovery | Eases short-term pressure |
| Interest Rate Adjustment | Allow a slightly lower rate (about 1% below sector average) | Provides meaningful relief |
| Regular Monitoring | Mandate quarterly progress reporting | Maintains transparency |
| Exclusion of Defaulters | Exclude willful or fraudulent borrowers | Protects system integrity |
| Sunset Clause | Make the facility temporary | Prevents long-term dependency |
By combining flexibility with strong oversight, governments and financial regulators can create a program that genuinely supports recovery while safeguarding the banking sector.
Conclusion
SMEs play a critical role in sustaining economies, generating employment, and driving innovation. However, with interest rates remaining high, many of them are struggling to service loans. An extension of the loan rescheduling facility could provide timely relief and allow them to stabilize operations.
Nevertheless, policymakers must ensure that such measures are time-bound, transparent, and well-monitored to avoid misuse. A balanced, well-structured rescheduling program can help SMEs stay alive and, in turn, keep the broader economy moving forward.
FAQ
Q1: What does loan rescheduling mean?
It means changing the terms of a loan to make repayment easier, such as by extending the payment period or lowering monthly installments.
Q2: Why do SMEs want this facility extended?
Because high borrowing costs have made it difficult to repay existing loans, and many businesses missed the original deadline to apply.
Q3: Does rescheduling mean loan forgiveness?
No. It only changes how and when the borrower repays; the loan amount still has to be paid in full.
Q4: Are there risks to extending the facility?
Yes. If used too often, it may weaken credit discipline, increase bad loans, and reduce banks’ profitability.
Q5: How can it be managed responsibly?
By limiting eligibility, setting clear deadlines, requiring partial payments, and monitoring progress regularly.
