The Reserve Bank of India on Wednesday eased its non-performing asset (NPA) recognition criterion for banks and non-banking financial companies (NBFCs) for some of their exposure to micro, small and medium enterprises (MSMEs) and removed the cap on loans to the sector that can be classified as priority sector loans. Loans to MSMEs account for about 15% of total advances of the Indian banking system. The central bank said certain exposures of banks and NBFCs to the MSME sector shall continue to be classified as a standard asset even if the dues are paid within 180 days from their respective original due dates. At present, banks and NBFCs classify loan accounts as NPAs based on the 90-day and 120-day delinquency norms, respectively. For the new norm to be effective, three conditions need to be satisfied: the MSMEs must be GST-registered; the aggregate exposure, including non-fund based facilities, should not exceed Rs 25 crore on January 31, 2018; the borrower account should be standard on August 31, 2017. It would apply to loans overdue as on September 1, 2017, and for payment from the borrower due between September 1, 2017 and January 31, 2018. A provision of 5% will have to be made by the banks and NBFCs against these exposures.
“It has been represented to us that formalisation of business through registration under GST had adversely impacted the cash flows of the smaller entities during the transition phase with consequent difficulties in meeting their repayment obligations to banks and NBFCs,” the RBI said in a statement, adding that this step has been taken as a measure of support to these entities in their transition to a formalised business environment. “This measure will provide some breathing space to the MSMEs so that they can manage their cash flows better. It is likely to be a temporary measure, and once the situation improves for the MSME sector, it will go back to 90 days,” said Krishnan Sitaraman, senior director, Crisil Ratings. He added that the measure is unlikely to have a material impact on the banking sector since the proportion of these loans is small.
The forbearance given to MSMEs supplements the favourable tax treatment accorded to this segment in the budget, Dinabandhu Mohapatra, MD & CEO, Bank of India, said. “This step will go a long way towards improving the MSMEs’ cash flows and will, in turn, help banks in managing their delinquency levels,” he added. The RBI also said that all bank loans to MSMEs, engaged in providing services, shall qualify under priority sector without any credit caps. “It has been decided to remove the currently applicable loan limits of Rs 5 crore and Rs 10 crore per borrower to MSME (Services) respectively, for classification under priority sector,” it said. SBI chairman Rajnish Kumar said, “The forbearance allowed to MSME borrowers, broadening the definition of priority sector lending and simplification of repo directions among others are all positive steps towards a stable macro environment.”