By Shritama Bose
The Reserve Bank of India (RBI) on Thursday extended the existing debt restructuring scheme for stressed micro, small and medium enterprises (MSMEs) by three months to March 31, 2021, in view of the distress brought upon by the Covid outbreak. The central bank also changed the cutoff date for MSMEs to become standard accounts in order to be eligible under the scheme to March 1, 2020 from January 1, 2020.
The extension of forbearance comes amid concerns that the asset quality profile of most lenders has undergone significant deterioration, even as bad loan ratios remain unchanged due to forbearance.
“A restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place. The scheme has provided relief to a large number of MSMEs,” RBI governor Shaktikanta Das said, adding, “With Covid-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support. Accordingly, it has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.”
Industry players welcomed the move as it is expected to give additional relief to small enterprises, over and above the government guarantee-backed emergency credit scheme for them.
Microfinance industry executives said their borrowers stand to benefit from the move. Chandra Shekhar Ghosh, managing director and chief executive officer, Bandhan Bank, said, “The one-time restructuring of corporate and personal debt, including those of MSMEs, will help alleviate the stress faced by borrowers in these difficult times, while ensuring the soundness of the banking system and focus on credit culture.” Ghosh added that further details on the scheme will have to be watched.
HP Singh, chairman and managing director, Satin Creditcare Network, said that the restructuring scheme will be a morale booster for the sector.
“Apart from these, it will help MFIs (microfinance institutions) create offers for their clients that will give an impetus to the expansion of borrowing and financial inclusion. With the rising stress on the lower strata of the economy, such meaningful and targeted policy support can pave the way towards quicker recovery and return to normalcy,” he said.
At the same time, concerns about asset quality in the MSME segment persist and there are worries that an extension of restructuring may only aggravate matters.
According to the RBI’s Financial Stability Report (FSR) released last month, 65% of system loans to MSMEs were under moratorium as on April 30. There is uncertainty around the ability of these borrowers to eventually repay. While the debt recast will help keep bad loan numbers under control through the duration of the scheme, there is danger of a spurt thereafter. In a recent report, India Ratings and Research said that between September 2019 and April 2020, the proportion of rated mid and emerging corporates (MEC) universe in default increased to 18% from around 10%. The agency estimates that 60% of its rated MECs qualify as MSMEs under the new definition.
“Although various regulatory and centre dispensations could keep downgrades in check in the near term, a protracted economic recovery could result in a significant rise in negative rating actions post the expiry of these forbearances,” the report said.