By Harish Kumar

Credit and Finance for MSMEs: A quick look at the annual report of Ministry of Micro Small and Medium Enterprises for the financial year 2018-2019, is enough to understand the significance of the Micro, Small and Medium Enterprises (MSME) in the Indian Economy. Precisely mentioning over 63 million MSMEs in India not only employ about 111 million people in India but at the same time contribute about 28 per cent of the total GDP, which signifies MEMEs being a vital constituent of the Indian economy. MSMEs account for about 33 per cent of the manufacturing output in India while contributing 45 per cent of the total export from India.

Ostensibly, the RBI having recognized the significance of MSMEs and their current liquidity challenges has recently issued a circular on February 11, 2020, thereby extended the deadline for the MSMEs to indulge in a one-time restructuring of their loans by another nine months till December 31, 2020. This would give MSMEs most sought opportunity to strengthen their balance sheet and continue operations in view of liquidity challenges, importantly to those which could not have got their accounts restructured under the erstwhile RBI circular dated January 1, 2019, providing for similar one-time restructuring.

Like the erstwhile circular (of January 2019), the new RBI circular provides for a scheme which allows for a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a consequent downgrade in its asset classification. Given the fact that MSMEs do have limited sources of funding, issuance of above circular is a welcome move as it will not only help the struggling MSMEs’ operations by giving them a new lifeline but would also help them raising necessary funds/finances in view of improved balance sheet, which would eventually contribute to keeping the foundation of the pillar of strength to the economy, strong and growing.

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Amongst others, the RBI circular requires that the eligible MSMEs (being a GST registered entity unless exempt from GST registration) should not have aggregate exposure (including the non-fund-based facilities) of banks and NBFCs exceeding Rs. 250 million as on January 1, 2020, to avail this one-time restructuring facility. Further, in order to ensure smooth functioning of the cash strapped MSMEs, a provision of 5 per cent in addition to the provisions already held, shall be made in respect of accounts restructured under the scheme. Looking at the ‘satisfactory performance’ demonstration during the ‘specified period’, the banks will have an option of reversing the additional 5 per cent. 

Restructuring under the said scheme shall be treated as implemented only if all related documents, including the execution of necessary agreements between lenders and borrower/creation of security charge/perfection of securities are completed by all the lenders. Furthermore, the new capital structure and/or changes in the terms of the conditions of existing loans should get duly reflected in the books of all the lenders and the borrower. However, the new RBI circular restricts restructuring of any such MSMEs’ accounts that have already been restructured under the erstwhile RBI circular of January 1, 2019.

The extension of one-time restructuring scheme is yet another positive reaffirmation step taken considering that the said scheme has already benefited about 5 lakh MSMEs since last RBI circular of January 2019. This will not only allow MSMEs to focus on its operations but also secure continue employments in the struggling economy.

Harish Kumar is the Partner at L&L Partners. Views expressed are the author’s own.