Tweaking the rules enabling more MSMEs to take Advantage of an Existing Restructuring Scheme

After the stress of the COVID-19 pandemic, financial institutions are continuously trying to support the MSMEs.

Debt accounts of MSME that are facing challenges of COVID-19 fallout are provided with some relaxation after the restructuring of advances. The second bi-monthly monetary meet of August 6 declared some relief to millions of stressed small businesses by extending the provision of restructuring of loans.

Restructuring: The restructuring of loans is an act where a lender gives concessions to the borrower who is facing financial instability due to economic or legal reasons. The process of restructuring involves modification of terms of the advances or securities which makes a change in alteration of repayment period/installment amount/ interest rate or enhancement of existing credit limits.

There are certain guidelines announced with the Resolution Framework for COVID-19. According to the new guidelines MSME accounts classified as ‘standard’ may be restructured without a downgrade in the asset classification, and are subject to the following conditions stated by RBI:

  • As on March 1, 2020, the all-over collective amount including the non-fund based facilities of banks and NBFCs to the borrower does not exceed 25 crores.
  • As of March, 2020, the borrower account should be considered as a ‘standard asset’ and will be retained as such. On the other hand, the accounts turned into NPA in between the day of restructuring plan implementation after restructuring plan implementation date. The benefit of the asset will only be provided if the restructuring is done as per the provisions.
  • The restructuring framework of the borrower account should be implemented by March 31, 2021.
  • The MSME account of the borrower needs to be GST-registered as on the date of implementation of the restructuring. However, MSMEs that are exempt from GST-registration are not liable to this condition.
  • As hitherto, banks will maintain an additional provision of 5% over and above the provision held by accounts restructured under these guidelines.

As the facility is only provided to the borrowers facing the stress of account due to covid 19. Furthermore, those accounts who do not come under such categories and don’t fulfill the above-mentioned conditions aren’t eligible for the benefits under restructuring.

The loan covered under the Covid-19 restructuring window:

  • Loans for consumer durables
  • Credit card receivables
  • Auto loans (except commercial use)
  • Personal loans secured by gold, immovable property, fixed deposits, shares, and bonds, etc., (other than for business / commercial purposes),
  • Personal loans to professionals excluding business purposes loan
  • Loans for consumption purposes like social ceremonies etc.

More borrowers can take advantage of this restructuring scheme by tweaking the rules and guidelines mentioned by RBI. As per the rules, RBI will permit the conversion of debt into securities. Thus, both types of loans borrowed by a company and individual can be recast.

Under the existing, restructuring scheme lenders or financial institutions can extend the tenure of the loans, permit the surplus credit, and also provide a moratorium of up to two years. The RBI is also permitting the conversion of debt into securities.

Borrowers are only eligible for the scheme if there is no due for more than 30 days as of March 1st. Banks will classify these as standard assets and make a capital provision of 10%. On the other hand, if any bank does not sign the inter-creditor agreement must provide 20% capital provision. Moreover, the resolutions plan should be invoked by December 31 and implemented within 180 days from the date it is invoked.

However, the restructuring framework will result in higher interest costs that also may have a long-term implication on the financial future. Hence, it is advised to opt for loan resolutions who are seriously affected by the covid-19 crisis.

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