Debt Restructuring for MSMEs Extended And RBI Tweaked Some Provisions

Reserve Bank of India extended the one-time debt restructuring for small businesses by another three months to March 2021. The step is taken in view of the continued need to support the viable MSME entities on account of the fallout of COVID-19.

Besides, the central bank has also relaxed some of the existing provisions for availing this scheme by the micro, small and medium enterprises (MSMEs).

With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support, RBI Governor Shaktikanta Das said while announcing the central bank's bi-monthly monetary policy outcome. "Accordingly, it has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021," he said.

As per the existing scheme, the borrower account had to be standard as on January 1, 2020.

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.

However, the RBI asked banks to maintain the additional provision of 5 per cent over and above the provision already held by them for accounts restructured under these guidelines.

The RBI has also retained the aggregate exposure limit of the existing guidelines. As a result, the exposure limit also including non-fund based facilities of banks and NBFCs to the borrower should not exceed Rs 25 crore as on March 1, 2020.

The MSME sector plays an important role in the growth of the Indian economy as it contributes over 28 per cent of the GDP, more than 40 per cent of exports, while creating employment for about 11 crore people.

Commenting on the scheme, PwC Partner Kuntal Sur said it is a good move by the RBI and would help MSMEs impacted by COVID-19 to get time and space to service debt when cash flows are under pressure due to uncertainty. Noting that a restructuring framework is already in place for MSMEs, he said it was subject to restructuring being implemented up to December 31.

The scheme has provided relief to a large number of MSMEs, he added.

"More than five lakh MSMEs have benefitted from restructuring of debt permitted by the RBI in the last year. The restructuring window was to end on March 31, 2020. The government has asked the RBI to consider extending this window till March 31, 2021," Finance Minister Nirmala Sitharaman had said in the Budget Speech.

In February, the RBI decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST-registered MSMEs that were in default as on January 1, 2020, in line with the Budget announcement.

In 2008 also, when the world was hit by the global financial crisis, the RBI had announced a one-time loan restructuring for several sectors to help them tide over the economic woes.