Loan restructuring support for MSMEs- A positive step.
RBI’s recent move to permit banks to restructure loans of MSMEs without classifying as NPA is seen as positive for stressed MSMEs
In a significant step, RBI has allowed a one-time restructuring of existing MSME loans that have defaulted but are not non-performing as on January 1, 2019. Such a debt restructuring, the central bank said, would not lead to a downgrade in asset classification. To be eligible for the debt restructuring scheme, the aggregate exposure, including non-fund based facilities of banks and non-banking financial companies (NBFCs), to a borrower should not exceed ₹25 crore as on January 1. Also, the restructuring has to be implemented by 31 March 2020.
In recent times, MSMEs have become an unintended target of a series of policy actions aiming at curbing at malpractices in tax compliance or tax evasion. The major policy actions which have severely affected MSMEs are- Implementation of demonetisation and the introduction of GST.
Back to back introduction of these two measures increased the vulnerability of MSMEs. Their debt servicing ability has been depleted due to lower sales and needs for time to readjust with rapid changes in the operating environment thrown by these two measures.
Recent RBI report also highlighted the issue of the increased level of Non Performing Assets among the MSMEs.
Restructuring support till now …
Loan restructuring is an important exercise to revive stressed business and widely practised worldwide. There are various mechanisms like bankruptcy courts to administer restructuring in many countries. Otherwise, it is administered through licensed practitioners. In India, the policy support for loan restructuring has been progressing well in recent times. However, its adoption is not to the level of satisfaction.
There is an existing framework for supporting the restructuring of those stressed MSMEs. RBI had released detailed guidelines for undertaking a restructuring of stressed MSMEs loans in the year 2016.
The measures suggested in the above guidelines are quite robust and indeed a good mechanism to support the turnaround of stressed MSMEs.
However, the performance under the above guidelines is very dismal. It is because the banks are required to classify those accounts undergoing restructuring as a non-performing asset for a specified period mostly one year. Further, if the bank extends any further loans as a part of the restructuring, such loans will also be classifieds NPA till then. This element of restructuring guideline is discouraging banks to extend helping hand to the struggling MSMEs.
The absence of support for those in distress is leading to a situation of increased pressure on MSMEs to repay the loan irrespective of the performance of the underlying business. Unable to bear with pressure from Bankers, many of them look for high priced short term borrowing further aggravating the stressed situation in the business leading to business failure and eventually severely hurting the personal finance.
The key features of the new guidelines:
1. Will not be NPA: The notable feature in the new guidelines is that the loan accounts undergoing restructuring need not be classified as NPA. This is the key improvement comparing to the previous one.
2. Applicable upto Rs 25 crores: The guidelines is that applicable for MSMEs upto Rs 25 crores of exposure from Bank and NBFCS. This is expected to cover almost all of the micro and small enterprises. However few of the medium enterprises will not be eligible.
3. Standard Asset as on January 1, 2019: The eligible borrowers are restricted to those which are classified as standard as on January 1 2019. This excludes many of the MSMEs who are badly affected by demonetisation as well as GST. Since a considerable amount of time has elapsed since then, many of the potentially viable businesses are not eligible to be cored under this guideline.
Make the restructuring mechanism a permanent policy measures to support MSMEs:
MSME segment is very delicate segment among the borrowing community for banks. They are undercapitalised, always on the edge from demanding Clients(OEMs), prone to delinquency from debtors etc.
However, they constitute an important segment of economy supporting employment generation and improving the competitiveness of Indian business ecosystem.
It takes years for an entrepreneur to establish his firm in terms of operating excellence, winning the confidence of clients, strengthening skill base, stabilising an efficient supply chain, etc.
Any decision of recalling the loan and initiating recovery measures as a fait accompli will destroy the value of enterprise built assiduously over a long period of time. Also, the larger society will also suffer due to the loss of employment opportunities.
Restructuring of viable businesses better proposition for larger society:
Bank loan recovery is important to ensure that banks recover the dues on time to return the money to depositors. However potentially viable businesses should be given chance to rescue from distress. Though restructuring elongates the repayment of bank loans and the bank need to endure with higher provisioning, it is a more valuable approach that benefits larger society.
If there is an enabling environment for reviving a stressed business, it will bring more value to larger society like saving employment, adding to national income along with repayment of bank loan.
In view of its importance, Govt should sensitise banks and other lenders to make restructuring as part of their lending programme for MSMEs. Govt may also explore incentivising the banks in terms of tax breaks or any other way so as to encourage them to extend helping hand to MSMEs in distress.
Changing business environment disrupts the business entities alike. However, MSMEs segment is more vulnerable to disruptive changes and require support to readjust to changed circumstances. Restructuring of loans from banks and NBFCs will be of great help to those in distress. It is a welcome measure.
Author: Anil Kumar Shetty, Founder SME Advisors