Analyzing RBI's Move for Controlling NPAs Among MSMEs

Faiz Askari
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Faiz Askari, SMEStreet, Entrepreneur, MSME Loans
By Faiz Askari

With election time is nearing, it seems that MSMEs are coming back on the center stage. RBI is now considering to provide MSME loans less than 25 Crores more time to restructure their loans before they become Non Performing Assets. This is undoubtedly a welcome step for MSMEs. One segment of the industry has welcomed this step, on the other hand, a segment of the industry still finds many loopholes in this move. However, the latter part of industry stakeholders seems to be still under the demonetization trauma.

Mr. R Narayan, Founder & CEO, Power2SME commented on the recent developments in the loan restructuring scheme pertaining to MSMEs by saying, “The RBI’s decision to allow banks to restructure stressed standard assets of MSMEs with aggregate credit of up to 25 crore rupees will provide much-needed relief to a number of small players in the sector. The central bank has also provided a reasonable time frame till March 31, 2020 for implementing the one-time restructuring of the loan amount. The restructuring will ensure that MSME accounts, which have defaulted but are still standard assets, do not turn into NPAs. This means that banks can continue to lend further to these companies. However, while restructuring of loan accounts will alleviate stress to some extent, there is an evident need for easier NPA and restructuring norms for smaller firms. At the same time, MSMEs need long-term solution that will not only provide them ample credit at reasonable interest rate but also make lenders confident about risk-reward framework vis-à-vis the sector.” He also added, “The banks’ reluctance to lend to MSMEs continues to be a key challenge for the sector. While schemes like 59 minute portal for credit of upto 1 crore rupees and 2 percent interest subsidy show the government’s intent in addressing the sector’s concerns, the need of the hour is some big steps including restoring priority-sector lending tag for MSMEs and specific incentives to disruptive fintech sector to lend more to the sector. Another critical issue plaguing MSMEs is the cycle of delayed payments. If the regulator can develop a mechanism where MSMEs get regular payments from their customers, the challenges of bad debt and requirement for repeated loans will be addressed to a great extent.”

Veteran industry body, FICCI welcomes this RBI move.

“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,” said Mr Sandip Somany, President, FICCI.

MSMEs are the backbone of the Indian industry, but generally, face greater vulnerability on account of the payment mechanisms which came under greater stress in recent times. The tight liquidity situation in the financial markets only exacerbated the problems faced by the MSMEs and a measure like the one announced by RBI was clearly needed to support these units.

“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,” said Mr Somany, adding that, “The RBI scheme should provide an incentive to the lenders to look at 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”.

RBI’s relief window for MSMEs together with other measures announced by the government for easier and affordable access to credit such as interest subsidy on loans should help in reviving growth of MSMEs and provide an added impetus to push the overall growth of the economy upwards of 8 per cent.

Moreover, on the contrary some industry experts and industrialists, have pointed out the demonetization’s ill impact on the industry and believed, Govt can't say that demonetization did not affect the economy and at the same time offer a life buoy to the MSME sector.”

Howevere, some buring questions which are still haunting the MSME entrepreneurs are:

If the MSME sector was unaffected, why would it have so much of non-performing assets?

And why would the non performing assets grow from 2,00,000 Crores in 2014 to 11,00,000 Crores in 2018, a growth of almost 5.5 times in 56 months?

If GST collection is falling in December 2018, then how can GDP be growing?

There is a 30,000 Crore shortfall in GST month on month in 2018.

There could be three reasons why GST collections are down. One could be that businessmen have found out ways to game the GST system, the second could be that sales of goods and services is really down. Third could be a mix of both. But the numbers are staring this government in the face. They will leave the economy in a royal mess by election time.

The next session of Parliament will be the budget session and the government will do a vote on the account as was done in 2014 by the then government and the new government will present a full budget after getting elected.

Considering the whole situation, the economic condition with respect to country’s MSMEs looks very blur.

But, one thing is absolutely sure that the importance of MSMEs have become so huge that this segment is going to influence the next big elections of India.

Power2SME MSMEs FICCI RBI Faiz Askari GST NPAs demonetization