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The policy of Restructuring and Rehabilitation of MSME

As stated by the Reserve Bank of India (RBI), the Micro, Small and Medium Enterprises (MSMEs) sector plays a significant role in the growth of the Indian economy. The sector comes up with over 28 percent of contribution in the GDP1 while giving job opportunities to people around 11 crores.

One-Time restructuring framework is initiated to eliminate the stress of financial borrowers affected by the covid-19. After the covid-19 pandemic, the burden of debt is making loyal borrowers face various challenges. Thus, the MSME framework is initiated to give breathing space for borrowers experiencing the poor financial condition.

One-time restructuring of loans to MSMEs borrower accounts was to be implemented by March 31, 2020. After considering the importance of Micro, Small, and Medium Enterprises RBI has decided to provide relief to a large number of MSMEs. But, taking this into account, the restructuring of the debt scheme is now extended to 31st December, 2020. This restructuring of loans is done for small businesses impacted by the Covid-19 pandemic.

To provide relief for the MSME sector borrowers who are facing bad impacts due to the conditions of lockdown, containment, supply chain, and trade choking, etc. an extension of the above continuing scheme is announced.

Eligible Lenders:

  • Under this scheme, MSMEs whose account does not undergo the title of non-performing assets (NPA) till March 1, 2020, and was preserved as ‘standard’ accounts will get benefit from the scheme. This will be implemented by March 1, 2021. 
  • Only MSMEs registered under the Goods and Services Tax with aggregate exposure up to Rs 25 crore as of March 1, 2020, can get benefits under this scheme. However, the other lenders with aggregate exposure are INR 25 crore or less as of 1 March 2020 will be excluded from its scope.
  • Borrowers with aggregate exposure of more than Rs 25 Crores are eligible for the scheme if not in default more than 30 days as of 1st March 2020.

Timeline and Framework: As per the August 6 Circular a resolution must be implemented no later than 31 December 2020. Furthermore, it must be applied within 90 days from the date of the invocation. 

The timeline seems possibly adequate for the most personal loans with a single Lending Institution. However, there are some more key points of the framework that are mentioned below:

  1. Identification Process by Creditors: The restructuring framework is applicable to MSMEs that are having loan limits up to Rs.25 crores. The scheme is also applicable to the accounts under consortium or multiple banking arrangements. It is the duty of banks or creditors to identify the early signs before any loan account of an MSME borrower turns into a Non-Performing Asset (NPA) under Special Mention Account (SMA) reports.
  • Identification process by the Borrower: Any MSME borrower can initiate proceedings under this framework if they wish to do so if they find the signs of failure of a business or their inability to pay debts. 

What if not undertaken within the timeframe?

  • The Inter Creditor Agreement (ICA) should be signed by 75% of lenders by value and 60% of lenders by number. If it is not executed within 30 days from the date of Invocation then it will be treated as Lapsed. Once the invocation has lapsed, the framework cannot be put into effect. 
  • Implementation should be done within 180 days from the date of Invocation to avail of the benefits otherwise it will be considered as lapsed.

The one-time restructuring framework gives an opportunity for stressed MSMEs for undertaking course correction or resolving any issue relating to financial lending. At the initial stage, the framework can be of great help for borrowers to bring stability in financial management. So, it is necessary to have some recovery measures at an early stage. In case of doubt, the borrowers can seek advice from appropriate authorities. 

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