Mumbai: The Reserve Bank of India (RBI) has allowed lenders to restructure loans of stressed micro, small and medium enterprises (MSMEs), provided the total fund and non-fund based exposure to a borrower doesn’t exceed 25 crore as on 1 January 2019. Mint analyses how this will affect MSMEs and lenders.

What are the terms of the MSME restructuring scheme?

RBI has allowed a one-time restructuring of existing MSME loans that have defaulted, but are not non-performing as on 1 January. Such a debt restructuring, the central bank said, would not lead to a downgrade in asset classification. To be eligible for the debt restructuring scheme, the aggregate exposure, including non-fund based facilities of banks and non-banking financial companies (NBFCs), to a borrower should not exceed 25 crore as on 1 January. Also, the restructuring has to be implemented by 31 March 2020.

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Why did it become necessary to provide some relief to MSMEs?

The government has been pushing RBI to provide relief to the stressed MSME sector. The central bank’s board on 19 November advised RBI to consider a scheme to recast loans of those MSMEs that were hurt by the demonetisation of high-value currency notes on 8 November 2016 and, subsequently, the implementation of the goods and services tax (GST) in July 2017. A study by RBI in August 2018 found that credit growth in the MSME sector, which had started slowing even before demonetisation, declined further after note ban was implemented.

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How important are MSMEs to lenders?

A Kotak Institutional Equities report on Tuesday said MSMEs form close to 25% of commercial lending in India as of FY18. The segment recorded an 18% year-on-year growth in Q1 FY19.

How will the scheme affect lenders?

Under this scheme, lenders have to set aside 5% of the outstanding loan as provision, over and above the current outstanding amount. All standard loans (being regularly repaid) attract 0.4% provision. The recast scheme ensures that MSME loans do not slip into the non-performing asset category, requiring 15% provision. RBI has also asked each bank and NBFC to formulate a policy for the scheme, with board approval for viability assessment of the stressed accounts and regular monitoring of the restructured accounts.

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What is RBI’s existing framework for resolving stressed MSMEs?

In March 2016, RBI notified a mechanism for resolving stressed MSME loans of up to 25 crore. Under this, banks classify stress in such loans into three categories—special mention account (SMA) 0, SMA 1 and SMA 2—depending on the delay in repayment. RBI data for the six months ended March 2017 show that 137,282 MSME loan accounts were referred for resolution. Of these, banks used rectification in 80,905 cases and made recoveries in 54,180 others. Only 2,197 accounts were recast.

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