Credit and finance for MSMEs: Finance Industry Development Council (FIDC), a representative body of non-banking financial companies (NBFCs) in India, on Tuesday suggested the government to treat retail loans to small businesses/individuals differently in comparison to large corporate loans. Seeking “flexibility” in MSME and individual loans, FIDC in its suggestions as part of pre-budget consultation to finance minister Nirmala Sitharaman said that to subject this segment of borrowers to stringent prudential norms which are at par with those for large corporate borrowers is not only imprudent but quite harsh and is bound to have a dampener effect on their credit worthiness.
For instance, the delay, if any, in repayment of loans by small businesses is due to genuine business or circumstantial reasons and not because of their intent. However, a thumb rule is followed by NBFCs to treat a borrower as “good” as long as he/she repays regularly, even if partially.
Moreover, a circular dated November 12, 2021, by the Reserve Bank of India (RBI) on prudential norms has mandated daily stamping of all loans as stressed/non-performing irrespective of the loan size, it said. The circular also prevents all loans that are classified as NPA to be upgraded unless the overdue amount is repaid in full.
“This shall lead to the small borrowers getting an NPA tag strictly at the end of the 90th day of delay and further prolonging the tag for a longer duration, till he/she repays the entire overdue amount. And this may happen for reasons that are totally beyond his or her control,” said FIDC.
To address this, FIDC suggested that retail and MSME loans up to Rs 2 crore may be permitted to be marked as special mention accounts (SMAs)/NPAs as of month end. Also, upgradation in respect of loans up to Rs 2 crore from the NPA to the standard category may be allowed to continue through partial repayment of arrears.
SMA accounts signal incipient stress in the unit that leads to defaults in debt servicing. While SMA-0 are accounts with payments partially or wholly overdue for 1-30 days, SMA-1 and SMA-2 accounts have payments overdue for 31-60 days and 61-90 days respectively.
FIDC also called for acceptance of arbitration as a valid legal step taken for debt recovery of delinquent accounts while processing claims under the ECLGS scheme. Already, arbitration has been the mode of adjudication adopted by NBFCs for recovery or settlement of NPAs as it avoids lengthy and costlier civil law remedies.
“In fact, the FAQs released by the government include arbitration as a sufficient step for claiming relief under the ECLGS… Further, the Supreme Court and the High Courts in the country, with a view to encourage Alternative Disputes Redressal mechanism, prefer and suggest the litigating parties to explore arbitration as per the 1996 Act before reaching the judicial forum,” said FIDC.
The association also sought an extension of the CGTMSE coverage to loans given to educational institutions. While educational institutions are covered under the definition of MSME, CGTMSE coverage is not available for loans given by NBFCs to educational institutions, it said. “Given that these educational institutions are now coming out of the tough times, there is a considerable need to provide adequate financing for the restoration of normalcy and for growth of the institutions.”