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Photo: Mint

RBI extends debt recast window for small borrowers by 9 months

  • New deadline for one-time restructuring scheme of micro, small and medium business loans set at 31 December
  • RBI tells banks to use an external benchmark to price loans to medium-sized enterprises from 1 April

MUMBAI : The Reserve Bank of India (RBI) on Thursday extended the deadline for a one-time restructuring scheme of small business loans by another nine months to 31 December.

“The micro, small and medium enterprises (MSMEs) sector plays an important role in the growth of the Indian economy, contributing over 28% of the gross domestic product (GDP), more than 40% of exports, while creating employment for about 110 million people," said RBI.

According to the central bank, it decided to extend the benefit of one-time restructuring because the process of formalization of the MSME sector has a positive impact on financial stability and this process is still underway.

This will not only benefit small businesses which could not be restructured under the earlier guidelines but also those that have become stressed since then.

“It is reemphasized that this is a one-time regulatory dispensation," said RBI.

This comes after finance minister Nirmala Sitharaman announced in her Budget speech last week that the government has asked RBI to consider extending the restructuring window till 31 March, 2021. “More than five lakh MSMEs have benefitted from restructuring of debt permitted by RBI in the last year," Sitharaman said.

Graphic: Ahmed Raza Khan/Mint
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Graphic: Ahmed Raza Khan/Mint


In January last year, RBI allowed lenders to recast loans of stressed micro, small and medium enterprises (MSMEs), provided the total fund- and non-fund-based exposure to such a borrower does not exceed 25 crore. Such a debt restructuring, the central bank had said, would not lead to a downgrade in asset classification. According to an RBI statement last year, a provision of 5% of the total outstanding loan, in addition to the money already set aside to cover potential losses, was to be made for such borrowers.

The central bank on Thursday also mandated banks to use an external benchmark to price loans to medium-sized enterprises from 1 April. At present, banks use an external benchmark, mostly the repo rate, to price loans for retail, micro and small enterprises.

“Subsequent to the introduction of an external benchmark system, the monetary transmission has improved to the sectors where new floating rate loans have been linked to the external benchmark. With a view to further strengthening monetary transmission, it has been decided to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective 1 April, 2020," said RBI.

The way banks set interest rates is critical for the smooth transmission of policy rates. To make this process transparent, RBI has over the years directed banks to price their loans against their benchmark prime lending rate (BPLR), base rate and then marginal cost of funds based lending rate. However, last year was the first time banks were asked to link their lending rates to an external benchmark.

In September last year, banks were allowed to choose between RBI’s repo rate, the three-month treasury bill yield published by the Financial Benchmarks India Pvt. Ltd (FBIL), government six-month treasury bill yield published by the FBIL or any other benchmark market interest rate published by the FBIL.

However, a bank will have to adopt a uniform external benchmark within a loan category, meaning that the adoption of multiple benchmarks by the same bank is not allowed within a loan category. While lenders can decide on the spread they charge over the benchmark to calculate the final interest rate, the spread can be changed only if the credit assessment of the borrower undergoes substantial change.

CARE Ratings said the dispensation would provide an additional window to MSMEs to restructure their debt and protect the current profitability of the banks by extending their provisioning requirements.

“Further, this is a one-time dispensation undertaken due to the adverse liquidity situation faced by the MSMEs and the slack conditions prevalent in the economy. However, care would need to be taken while restructuring such assets so as to avoid extended provisioning requirements later on in the banking sector," it said in a note.

According to RBI’s Trends and Progress in Banking, 2019, the outstanding banking sector credit to MSMEs was 15.11 trillion and gross NPAs were 87,000 crore (5.8% of total loans).

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