After Agri, Debt Waiver for MSME Also !

RBI has announced debt relied package for MSME up to loan amounting Rs 25 Crore – The newly appointed Governor of Reserve Bank of India (RBI) Shaktikanta Das has taken the major decision providing the debt relief to MSME as credit to the SME sector was one of the contentious issues raised by government-appointed board members in RBI’s board meetings. Governor had earlier, in consultation with the government, named a committee to look into the transfer of RBI’s surplus reserves to the Centre.

RBI hinted that this move will benefit thousands of troubled small businesses. Banks and finance companies will grant debt relief to micro, small and medium enterprises (MSMEs) with loans of up to Rs 25 crore.

Read – Government Directs ‘Common MSME Loan Product’ for all PSBs For 59 Minutes Loan

Debt relief is for all such accounts which are not yet classified as Non Performing Assets (NPA). The Reserve Bank of India said the loan restructuring would be subject to the borrower being GST-registered on the date of implementation of restructuring.

In terms of the scheme, the restructuring must be implemented by March 31, 2020. Banks will need to make a provision of 5% towards these restructured loans. Each bank/NBFC should formulate a policy for this scheme with board approval. Those MSMEs that are not exempt from GST will need to be registered on the GSTN on the date on restructuring.

RBI has already issued circular to all banks and NBFCs in this reagrd. RBI said

MSMEs form an important component of the Indian economy and contribute significantly to the country’s gross domestic product, 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.

What’s about ?

1. Banks and shadow banks are being allowed a one-time restructuring of loans of up to 25 crore to micro, small and medium enterprises that were in default on Jan. 1, without having to mark them as nonperforming.
2. Banks/NDFC are being given an extension of 15 months (up to March 31, 2020) to pretend that these stressed loans are standard.
3. Banks need to do is to make additional 5 percent loss provisions. By contrast, a secured loan classified as nonperforming attracts immediate provisioning of 15 percent, rising progressively to 40 percent – even 100 percent – as recovery became increasingly doubtful.

RBI in view that the SMEs are the worst hit among various industry segments following demonetization and implementation of the Goods and Services Tax (GST). Availability of credit to MSMEs declined further after the IL&FS default crisis which led to bank credit to non-banking finance companies drying up. This in turn reduced the ability of NBFCs to lend to MSMEs.

Banker’s are having their own prescriptive, according to bankers, the sector was facing a liquidity problem because of lack of confidence of banks who had turned risk-averse in the wake of rising bad loans. RBI’s decision to insist on MSMEs registering on the GST network is expected to hasten formalization of the MSME sector which will improve the banks’ ability to lend to such enterprises. Access to GST details will give banks better information about the MSMEs cash flows and creditworthiness.