Transformation of the Polish economy from the centrally planned into the market one has caused a dramatic increase in bad credits in the Polish portfolios. The paper analyses bad debt restructuring process commenced in 1993 for two large banks, and evaluates the effects of the process on the whole banking sector's security.

Due to the restructuring process banks' loan portfolios have been set in order, and weakest debtors eliminated. In spite of more than 60% of debt reduction achieved in the course of the restructuring process, 20% of the restructured debt failed to be repaid and over a half of borrowers failed to meet all terms and condition set in reconciliation agreements.

According to the research, banks performed an appropriate selection of debtors to be restructured choosing enterprises with much better financial performance and rejecting those with worse performance. Nevertheless, financial restructuring proved to be inefficient in terms of its effects on operational activity, market position and profits.

The restructuring process was implemented with too much delay and, therefore, banks recovered only one third of restructured receivables, including changes in the value of money over time.

From the point of view of the group of 11 major banks, the financial restructuring process proved to be efficient and resulted in the reduction of bad credits share in loan portfolios from 27% in 1992 to 9% in 1996-1998.

A fundamental finding arising from the process up to now is that restructuring should be started as early as possible, and that in order to achieve satisfactory results it is usually necessary to find a strategic investor.