The proposed loan restructuring mechanism for micro, small and medium enterprises (MSME) with loans up to ₹ 25 crore is likely to be based on the existing government “framework for revival and rehabilitation of MSMEs", albeit with a few tweaks, said a person aware of the development.
“While the existing framework provides for early detection of stress in MSMEs and charts a mechanism for resolution, the new scheme could perhaps relax the existing stress recognition timelines," the person cited above said, requesting anonymity. The government has been pushing the Reserve Bank of India (RBI) for some sort of relief to the MSME sector, and the board on 19 November advised the central bank to consider a scheme to recast MSME loans.
In March 2016, RBI had notified an updated mechanism for resolving stressed MSME loans of up to ₹ 25 crore. The guidelines said banks should classify stress in such loans into three categories—special mention account (SMA) 0, SMA 1 and SMA 2 —depending on the delay in repayment of loans. While borrowers delaying repayments by up to 30 days should be classified as SMA 0, borrowers delaying by 31-60 days and 61-90 days will be classified as SMA 1 and SMA 2, respectively. The loans still remain standard even in these categories and turn bad only after a delay of more than 90 days.
Once an MSME borrower turns SMA 2, the bank has to refer it to a committee that will look for a resolution plan. The resolution plan may be of three kinds—rectification, restructuring and recovery. Under rectification, lenders are allowed to provide additional finance to the borrower. Under restructuring, the borrower’s loan repayment schedule is extended and interest rate reduced to ease the repayment pressure. In recovery, lenders pursue legal routes to recover dues.
According to RBI data, for the half year ended March 2017 (latest available), 137,282 MSME loan accounts were referred to these committees for resolution. Of these, banks used rectification in 80,905 cases, recovery in 54,180 cases, and only 2,197 loans were recast. However, the quantum of loans for these categories is not available.
The amount of gross bad loans in the micro- and small enterprises (no data for medium) has been growing over the last few years and stood at ₹ 82,756 crore in FY17, up from ₹ 70,842 crore in FY16 and ₹ 51,952 crore in FY15.
Meanwhile, the industry believes that lenders are restructuring only a handful of MSME loans while others are being subjected to recovery. Minutes of the meeting of the National Board for Micro, Small and Medium Enterprises (NBMSME) held on 26 February showed that its members wanted to request the department of financial services (DFS) and RBI to increase the bad loan classification deadline for micro and small enterprises from 90 days to 180 days. “Members also expressed their concern that in a very large number of cases the committees are taking a decision to recover the amount and re-working is only being done in less than 50% of the cases," the minutes of the meeting said.
A “Mint Street Memo" released by RBI in August pointed out that demonetization of ₹ 500 and ₹ 1,000 currency notes led to a further decline in the already-decelerating credit growth of the MSME sector. However, recent data shows that lending to MSMEs has recovered and for the fortnight ended 28 September 2018, bank loans to the sector grew 2.3% year-on-year (y-o-y) to take the outstanding loans to ₹ 27 trillion.
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