New Delhi: The Reserve Bank of India (RBI) will consider a scheme for restructuring of stressed assets of micro, small and medium enterprises (MSMEs) with loans of up to 25 crore on the advice of its board which met on Monday. However, the MSME loan restructuring scheme will be subject to conditions that are necessary for “ensuring financial stability", RBI said in a statement after a nine-hour marathon meeting.

At the last RBI board meeting on 23 October, independent directors and government nominees had asked the central bank about the number of MSMEs facing credit default. RBI said it did not have the data readily available to it and promised to submit the data in the November meeting.

“The government thinks that demonetisation and the goods and services tax (GST) have negatively affected the MSME sector and squeezing credit to them at this time may put them in further trouble," a person with knowledge of the discussions within the RBI board said, speaking under condition of anonymity.

The government is also worried that squeezing of liquidity at a time of ongoing elections in five states and ahead of general election in early 2019 may dent it politically, the person said.

The latest liquidity crunch faced by MSMEs started with the unearthing of the PNB fraud after which banks turned reluctant to offer trade finance to small businesses, said Chandrakant Salunkhe, founder and president of SME Chamber of India.

Nirav Modi and his uncle Mehul Choksi are the prime accused in the 13,000 crore fraud at the Punjab National Bank in Mumbai that came to light in February this year.

Non-banking financial companies (NBFCs), a key source of funds for small businesses, saw their liquidity drying up after debt-laden Infrastructure Leasing and Financial Services (IL&FS) started defaulting on loan repayments, leading to the government superseding its board in early October.

Industry representatives say the latest cash crunch covers trade finance, working capital requirements and investments into plant and machinery.

Salunkhe said that about 900,000 MSMEs have closed down over the last couple of years since demonetisation in November 2016. The hardship faced by the sector prompted Prime Minister Narendra Modi to announce a series of steps to improve their access to credit on 2 November, including sanction of loans up to 1 crore in less than an hour to help small firms that seek finance and market access. According to Giriraj Singh, minister of state for MSMEs, there are 65 million MSMEs in the country that provide 120 million jobs.

“Out of the 15 lakh (incorporated) companies in the country, 15,000 are medium-sized ones. If the liquidity crisis is not resolved, none of these will graduate into larger companies in the next few years," said Salunkhe.

The issue of liquidity was earlier dealt with at length at the Financial Stability and Development Council meeting chaired by finance minister Arun Jaitley. During that meeting, finance ministry officials asked RBI not to let the NBFC liquidity issue get out of hand as there was a risk of it spilling over into other sectors. RBI officials said there is robust credit growth and it does not have any data that suggest NBFCs are facing a liquidity crunch. At this stage, Jaitley advised banking secretary to provide necessary data to RBI in this regard.

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