The Reserve Bank of India (RBI) on Tuesday allowed lenders to recast loans of stressed micro, small and medium enterprises (MSME), 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 said, would not lead to a downgrade in asset classification.
“RBI has decided to permit 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,” RBI said in a statement.
The government has been pushing RBI to provide relief to the stressed MSME sector. The central bank’s board on 19 November advised RBI to consider a scheme to recast loans of MSMEs, which have been hurt by the disruption caused by demonetisation in late 2016 and the implementation of the goods and services tax (GST) in July the following year.
The MSME loan restructuring, according to the RBI statement, has to be implemented by 31 March 2020 and a provision of 5% of the total outstanding loan, in addition to the money already set aside to cover potential losses, will have to be made for such borrowers. “Each bank or non-banking financial company (NBFC) should formulate a policy for this scheme with board approval which shall, inter alia, include framework for viability assessment of the stressed accounts and regular monitoring of the restructured accounts,” RBI said.
The regulator also said that MSMEs form an important component of the Indian economy and contribute significantly to the country’s gross domestic product (GDP), exports, industrial output and employment generation. “Considering the importance of MSMEs in the Indian economy, it is considered necessary at this juncture to take certain measures for creating an enabling environment for the sector,” it said.
The issue of restructuring of MSME accounts, RBI added, was discussed in the RBI board meeting on 19 November and also during RBI’s recent interactions with banks and other stakeholders.
In March 2016, RBI had notified a 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, those 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 in payment of more than 90 days.
According to data from the central bank, for the six months ended March 2017 (the latest available), 137,282 MSME loan accounts were referred 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 sector (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 the previous year and ?51,952 crore in FY15.