Critical Success Factors And Warning Signals In Bank Loan Restructuring For Financially Distressed Msmes: A Qualitative Study Of Indian Manufacturing Enterprises

Abstract

Micro, Small, and Medium Enterprises (MSMEs) constitute a crucial element of India’s economic framework, significantly contributing to GDP, employment generation, and inclusive growth. Despite their strategic significance, MSMEs encounter persistent challenges in accessing institutional finance, particularly during financial distress. This study examines the effectiveness of bank loan restructuring as a recovery mechanism for financially stressed manufacturing MSMEs in India. Employing a qualitative multiple case study approach, the research investigates both successful and unsuccessful restructuring cases to identify critical success factors, behavioural warning signals, and systemic barriers. The findings highlight the importance of non-financial variables—such as promoter credibility, the quality of the bank-MSME relationship, and management capability—in influencing restructuring outcomes. The study further identifies early warning signals, including fund diversion, fraudulent accounting practices, and the disengagement of key personnel. Drawing from interviews with promoters, CFOs, and bankers, a conceptual framework is developed, integrating financial and behavioural dimensions to assess restructuring viability. The study addresses gaps in existing restructuring literature, which predominantly focuses on large corporations and emphasizes financial metrics over qualitative variables. It contributes to theory by reinforcing relationship banking and signalling theories. Practically, the research offers policy recommendations for more holistic restructuring frameworks that integrate behavioural assessments alongside financial analysis. The findings call for proactive engagement from banks and policymakers to ensure timely, transparent, and context-sensitive support to distressed MSMEs, thereby preventing premature closures and enhancing sectoral resilience. Future research may adopt quantitative or cross-sectoral approaches to validate and extend the propositions generated in this study.