RBI gives release to the MSME sector provides for one-time reformation of loans. This decision will help the micro, small and medium enterprises, which are facing a cash crunch in the awaken of demonetization and GST accomplishment.
In a new year gift to the MSME sector, the Reserve Bank Tuesday allowed a one-time reformation of existing debt up to Rs 25 crore for the companies which have defaulted on payment but the loans given to them have continued to be classified as standard assets. The decision will help the micro, small and medium enterprises (MSMEs) which are facing a cash crunch in the wake of demonetization and GST implementation.
The RBI's board in its critical meeting held on November 19, 2018, had advised the central bank to inspect a scheme for a restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to such circumstances as are necessary for ensuring financial stability.
To facilitate meaningful reformation of MSME accounts that have become stressed out, the RBI has decided to permit a one-time improvement of existing loans to MSMEs that are in default but 'standard' as on January 1, 2019, without an asset classification downgrade, the central bank said in a statement.
To be eligible for the scheme, the aggregate disclosure, including non-fund based facilities of banks and NBFCs, to a borrower should not exceed Rs 25 crore as on January 1, 2019, and the reformation has to be implemented by March 31, 2020. Restructuring package for MSME was one of the sore points of the tussle between the RBI and the government. There was a detailed arrangement by Financial Services Secretary Rajiv Kumar on the cash crunch being faced by the MSME sector at the crucial November 19 board meeting. The government had suggested several steps to help the sector which contributes 50 percent to the manufacturing sector.
"A major step for MSMEs with a total liability up to 25 cr suffering from past issues and illiquidity, though delayed. Congratulations RBI for the reorganize circular," Swadeshi ideologue and RBI board member S Gurumurthy tweeted. Gurumurthy was pushing for relief to the MSME sector which provides 12 crore employment, the second largest after the agriculture sector. "MSMEs are vital for India's economic ascension. Several initiatives including customized products and strategies as per their needs and automated loan processing have been introduced to achieve faster rotate and accelerate MSMEs' growth," Kumar had said last year.
As per the notification, "A provision of 5 percent in addition to the provisions already held, shall be made in respect of accounts rationalized under this scheme. Each bank/NBFC should formulate a policy for this scheme with board approval which shall, inter alia, include the framework for viability appraisal of the stressed accounts and regular monitoring of the rationalized accounts."
The borrowing entity is GST-registered on the date of implementation of the Reformation. However, this condition will not apply to MSMEs that are exempt from GST-registration, it said. According to the notification, banks and NBFCs adopting this scheme will put in place a board-approved policy on the reformation of MSME advances under these commands within a month from the date of this circular. The policy will include the framework for viability assessment of the stressed accounts and regular monitoring of the rationalized accounts. "It is clarified that accounts classified as NPA can be rationalized; however, the extent asset categorization norms governing reorganization of NPAs will continue to apply," it said.
