Loan Restructuring support for MSMEs –Extension is positive

The extended restructuring window to assist the MSMEs in distress is a welcome step. However, its utility depends on how we draw the restructuring proposal.

Finance Minister Mrs Nirmala Seetharaman in her budget speech announced that the scheme of one-time restructuring of existing MSME loans that have defaulted but are not non-performing as on  January 1, 2020, will be extended for one more year. Consequently, RBI also took steps to issue the notification in this regard.

The key points as below:

1.      The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed ₹25 crores as on January 1, 2020.

2.      The borrower’s account was in default but was a ‘standard asset’ as on January 1, 2020, and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring.

3.      The restructuring of the borrower account is implemented on or before December 31, 2020.  

4.      The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on January 1, 2020.

5.      It is clarified that accounts which have already been restructured in terms of the RBI’s previous circular dated January 1, 2019 shall be ineligible for restructuring under this circular.

The impact:

Extending the support by another nine months is a good step to assist the MSMEs to restructure their business and work out a turnaround path for themselves.

In the ongoing economic slowdown and growing incidences of Covid-19 outbreak, many MSMEs may suffer liquidity stress and require some breathing space to realign the financial model. If any entity experiences symptoms of distress, it is better to approach the bank to restructure the loans than seeking short term high-cost borrowing to keep the account regular.

However, we observed that due attention is not given to draw the proposal to avail its benefit.

The key factor of failure of restructuring – Not synchronizing  with cash flow:

Recently I met an entrepreneur who has availed this facility in the month of September 2019. Despite restructuring, he is still grappling with the same level of distress as it was prevailing before. Upon reviewing the revised repayment schedule, I found that it was drawn arbitrarily and there was no linkage to the business characteristics and cash flow from the operations. I found that the restructuring is undertaken without drawing financial projections and solely with the focus of avoiding to classify it as NPA.

It is not the right approach. The scheme is a one-time opportunity for both borrower and banker to undertake a course correction so that precious public money will be returned in an orderly manner. It is an appropriate context to review the business holistically and draw a  realistic financial projection for the few years and draw the repayment schedule based on that.

Arbitrariness in fixing the revised schedule will not serve any purpose and likely to render the project unviable leading to perennial distress. A situation can be easily avoided provided we give little attention to make a detailed and realistic financial plan.

We suggest  a simple process to make restructuring successful:

1.      Review the business holistically and understand the challenges and opportunities  in a very unbiased manner

2.      Draw a realistic financial projection based  on step 1

3.      Identify the needs – Rescheduling the existing loan/s, carving the  deficit, seeking additional funding, stretching the repayment holiday etc

4.      Make a comprehensive formal proposal and don’t accept the changes if it does not support the planned turnaround.

5.      Highly desirable to seek expert support while drawing a revival and restructuring plan


A sustainable and enduring turnaround from financial distress requires a very meticulous approach. Restructuring of bank loan is an important step in this regard. The exercise needs to be approached with the utmost care and due concern to cash flow. As emphasized by the RBI circular, it is a one-time benefit for stressed MSMEs to undertake course correction. Don’t ignore the basics.