Will RBI's Loan Restructuring Scheme Have a Significant Impact on MSME Growth?(by Aastha Singhal)

As of January 2019, RBI has permitted a one-time restructuring of existing loans to MSMEs

In a relief to India’s crucial micro, small and medium enterprises (MSMEs), the Reserve Bank of India (RBI) has introduced a one-time loan restructuring scheme for the borrowers with the total fund and non-fund based exposure of up to INR 25 crore. RBI stressed that the scheme is applicable only for enterprises that are default but ‘standard’.

In an official statement, the apex bank confirmed, “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.” It further mentioned that the restructuring has to be implemented by March 31, 2020.

Watcher’s Take

Restructuring without an asset classification downgrade will save the lenders from higher provisioning burden. Hailing the move, Sandip Somany, President, FICCI said, “This will provide a much-needed boost to the small and medium enterprises that had been reeling under financial pressures on account of reasons beyond their control.”

Touted as a New Year gift by the Reserve Bank to MSMEs, a comparatively vulnerable group or organization on account of the payment mechanisms and the tight liquidity situation in the financial markets, the measure is expected to bring a relief to organizations that were hit by the implementation of demonetization and goods and services tax (GST).

In addition to the interest subsidy on loans announced by the government for easier and affordable access to credit, RBI’s step should help in reviving growth of MSMEs. “The relief comes at the right juncture and will provide the much-needed momentum to push the growth levers as MSMEs make a significant contribution to domestic output, exports as well as job creation,” added Somany.

Lender’s Job

The RBI has further mandated a provision of 5 per cent of the outstanding amount in addition to the previously held amount to cover potential losses, in respect of accounts restructured under the scheme.

“Each bank or non-banking financial company (NBFC) should formulate a policy for this scheme with board approval which shall, inter alia, include a framework for viability assessment of the stressed accounts and regular monitoring of the restructured accounts,” the statement said.

While the loan recast decision has come as a blessing for the MSMEs, lenders’ job intensity has increased. Seeking benefits for the lenders, Somany added, “The RBI scheme should provide an incentive to the lenders to look at the restructuring of the loans extended to MSMEs in a more pragmatic manner and we hope that it will also expedite decision making in this regard”.

While introducing the scheme, the central bank has clarified that the borrower needs to be GST-registered on the date of implementation of restructuring to avail the measure. After agriculture, the MSME sector is the second largest job creator in the country with over 12 crore employees