RBI gives Covid-hit MSMEs one more window for restructuring loans

Businesses that didn’t slip into NPA till March 1, and were treated as ‘standard’ accounts will benefit from the scheme which will have to be implemented by March 1, 2021


MSMEs | Reserve Bank of India RBI | Non-performing Asset

The Micro, Small and Medium Enterprises (MSMEs) got another window of breather from the Reserve Bank of India (RBI) on Thursday which allowed restructuring of loans for small businesses impacted by the Covid-19 pandemic.

MSMEs that didn’t slip into non-performing asset (NPA) till March 1, 2020 and were treated as ‘standard’ accounts will benefit from the scheme which will have to be implemented by March 1, 2021. This is an extension of a continuing scheme, in place till December 31, 2020, which was meant for ‘standard’ accounts till January 1, 2020.

The move is significant as the chance of an MSME loan account slipping into NPA is higher than that of others. In its financial stability report released last month, the RBI had said that the MSME sector has been affected during the pandemic because of lack of cash flows.

“The restructuring will provide the necessary relief to the MSME sector which has experienced one of the most severe impact resulting from the conditions of lockdown, containment, reverse migration, supply chain and trade choking etc, due to Covid,” said Uday Kotak, President of the Confederation of Indian Industry.

However, only MSMEs registered under the Goods and Services Tax with aggregate borrowings up to Rs 25 crore as of March 1, 2020 will be covered under the scheme.

ALSO READ: RBI to set up ‘Innovation Hub’ for financial inclusion, efficient banking

“Asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan,” the RBI circular dated August 6 stated.

The existing restructuring scheme was applicable to around 900,000 MSMEs. Till January 31, 2020, more than 600,000 MSME accounts were restructured by the public sector banks of amount involving Rs 22,650 crore.

A recent RBI analysis showed that the MSMEs were the highest proportion of loan segment, in terms of amount, to avail the moratorium facility (i.e. pause in repayment of loans). Around 65 per cent of loan outstanding for MSMEs were under moratorium till April 30.

Union Bank managing director and chief executive officer Rajkiran Rai G. said that the MSMEs will be able to recover back to normalcy in another one-two years with the RBI’s move.

“The policy decisions reflect a good understanding of the working of MSMEs and restructuring matching the cash flow, factoring the impact of Covid-19, will reduce slippage in MSMEs to a large extent if handled well. This move coupled with the government’s emergency credit line will help the MSMEs to restart business with no immediate pressure of loan repayments,” Rai said. He added that though the restructuring for corporate accounts will have a lot of safeguards, the scheme for MSMEs was more liberal.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) pointed out that restructuring or liquidation exercise becomes difficult for loss-making MSMEs because of competing claims of multiple creditors who want to take possession of MSME assets, in the absence of Insolvency and Bankruptcy Rules for proprietorship and partnership firms. Such firms make up more than 90 per cent of the sector.