The Reserve Bank of India (RBI) has opened a loan-restructuring window for micro, small and medium enterprises (MSMEs) for a year, yielding to a key demand of the government that had sought such a facility, which former governor Urjit Patel was reportedly not too keen on.
RBI on Tuesday allowed a one-time restructuring of existing loans to MSMEs that are in default but ‘standard’ as on January 1, 2019, without an asset classification downgrade. The restructuring has to be implemented by March 31, 2020. RBI has allowed the scheme for restructuring of stressed assets with credit facilities not exceeding Rs 25 crore as on January 1.
The issue of restructuring of MSME accounts was discussed in the meeting of the central board of RBI on November 19, 2018. Financial services secretary Rajiv Kumar had made a three-hour-long presentation supporting the government’s stance for providing a boost to the MSME sector. The matter was also discussed during RBI’s recent interactions with the banks and other stakeholders. In various meetings, stakeholders have raised concern that funding of MSMEs would take a hit if the issue of
liquidity is not addressed.
Under the scheme, a provision of 5% in addition to the provisions already held will be made in respect of accounts restructured. RBI asked banks and non-banking finance companies to come up with board-approved policies. This will include the framework for viability assessment of the stressed accounts and monitoring of the restructured accounts regularly.
The relief is for a borrowing entity that is GST-registered on the date of implementation of the restructuring. However, it will not apply to MSMEs that are exempt from GST-registration.
Lenders were looking for relief in restructuring stressed assets of mid-sized and small SMEs to help them tide over a period of tight liquidity. The MSME sector contributes to nearly a third of the gross domestic product and employs 111 million people, accounting for about 45% of manufacturing output and 40% of total exports, data from RBI showed.
Other Steps for MSMEs
A large number of MSMEs exist outside of the formal space and face difficulty in accessing credit. RBI has taken several steps such as setting up the trade-receivables discounting system and allowing banks to co-originate loans with non-banking finance companies to facilitate flow of credit to the sector.
In its latest report, RBI had said that the trade receivables discounting system (TReDS) — an institutional mechanism to facilitate financing of trade receivables of MSMEs from corporates and other buyers, including government departments and the public sector — has been gaining traction. The three entities that were granted authorisation to set up and operate TReDS collectively registered 1,878 MSMEs, 235 corporates and 57 banks.