RBI Loan Restructuring for MSME up to Rs 50 crores

Due to the second wave of the COVID-19 pandemic, the RBI (Reserve Bank of India) provide some relief by doubling the limits of loan restructuring for MSME (Micro, Small, and Medium Enterprise) and small borrowers up to Rs. 50 crores. According to the Government data, today, the condition for MSME is not bad as it was a few months earlier. They are still in their recovery phase but displaying marginal growth. That’s why the Government of India released the second version of their promising scheme through Resolution Framework 2.0. This scheme is meant to provide MSMEs on account to developed or improved credit thresholds. The new scheme comes up with a modified credit limit which is double the threshold available in the earlier version. The RBI informed on June 02, 2021 that the maximum limit for loan restructuring for MSME, small companies or loans to business proprietors has been increased from Rs. 25 crores to Rs. 50 crores.

On May 05, the Central Bank declared the second round of loan restructuring for MSME borrowers, small entities or businesses, and individuals who didn’t avail of the facility in the earlier round. Under the Resolution Framework 2.0, businesses and individuals can choose for loan restructuring option for up to Rs. 25 crores, now it has been increased up to Rs. 50 crores.

Loan Restructuring – Meaning

It refers to the facilities provided by the financial organisation to the borrower owing to their financial woes increasing from either economic or legal reasons. This facility is not applied to other conditions and, in general, shall consist of facilities on lending terms and conditions by changing some contract terms (inclusive of interest capitalisation and product change), which majorly relate to the interest, maturity term, collateral implementation to cover up the loan debt, supersession of the actual borrower.

Impact of Loan Restructuring on Credit Growth

Borrowers should also remember that loan restructuring will impact their credit score and, therefore, their loan eligibility. The Reserve Bank of India had asked banks to report such matters as “restructured” to credit bureaus in the previous restructuring. Loans said that restructured damages the borrowers’ credit scores.

If a borrower has two/three credit lines with a bank and chooses for recasting the debt of even a single loan, the lender will report all three as restructured to credit bureaus. If a borrower has an auto loan, a credit card, and a personal loan from the same financial organisation. He chooses for restructuring the credit card outstanding. The lender will report all three as restructured.

Eligibility – Loan Restructuring for MSME

Borrowers are having collective exposure of up to Rs. 50 crores & who has not availed restructuring under any of previous restructuring frameworks (comprising under the Resolution Framework 1.0 dated 6^th August, 2020) and who were categorised as “Standard” as on March 31, 2021 shall be eligible to be considered under Resolution Framework 2.0, the Central Bank stated.

It is crucial to know the notion of “Standard Account” in this background. Often, this word is confused with an overdue account. A standard account mentions a loan that is not an NPA (Non-Performing Asset). An NPA or Non-Performing Asset is a loan that has been overdue for the previous ninety days. On the 91^st day of due, such a loan is transferred into an NPA or bad debt. Hence, an account that was not categorised as NPA on March 31, 2021, can have access to the Resolution Framework 2.0.

Who can Avail the Benefits under Resolution Framework 2.0?

Following individuals can have access to the benefits available under the Resolution Framework 2.0^[1]:

1. Individuals or the person who have availed of advances and loans for the purposes of business and to whom the lending institutions and organisations have aggregate exposure of not more than Rs. 50 crores as of March 31.;
2. Small entities or businesses, including those involved in wholesale and retail trade, other than those categorised as MSME as of March 31, 2021 and to whom the lending institutions have aggregate exposure of not more than Rs. 50 crores as of March 31.

Last Day for Applying

Banks and financial organisations can invoke restructuring under the suggested framework till September 30. The time for loan moratorium needs to be executed within ninety days after the invocation. The expansion of Resolution Framework 2.0 from Rs. 25 crores to Rs. 50 crores will make more prominent the credit coverage to a higher number of businesses or companies and individuals. Considering the crucial contribution of MSMEs to GDP, the relief measures will foster MSME recovery and additional encourage financial stability in the economy.

For those who get the one-time loan restructuring previously:

• Lenders and banks can extend the loan restructuring option up to two years for those who have opted moratorium in the previous round.;
• The RBI (Reserve Bank of India) has confirmed that small companies could access this option to address their existing liabilities.

Conclusion

According to the credit scoring agency Crisil, around 2/3^rd of the medium-sized companies can have access to loan restructuring for MSMEs after the increase of the aggregate exposure threshold up to Rs. 50 crores. The proposed agency rates around 6900 medium-sized companies, of which nearly 4700 are small scale companies. These companies are having exposure to bank loans of up Rs. 50 crores and standard accounts as of 31^st March, 2021.

Read our article:What is MSME and What are the benefits of MSME Registration?