To curb financial instability amid the unprecedented situation of COVID-19, RBI has announced a one-time restructuring loan. The scheme/plan aims to save and revive the MSME sector and support individuals who have taken MSME loans.
Micro, small and medium enterprises are the backbone of the Indian economy. This sector contributes 6.11% of manufacturing GDP and accounts for 24.63% and 33.4% of GDP from service activities and manufacturing output, respectively and 45% of overall exports of India. Read on to know this loan restructuring will impact medium and small businesses.
Impact of loan restructuring on MSMEs
Loan restructuring refers to the process that revises the repayment period, repayable amount, and the total number of monthly instalments and likes.
As per the notifications, lending institutions had to repay the EMI after 6 months of the moratorium period, i.e. from 31st March-31st August 2020. Further, the government had intimated to the Supreme Court that MSMEs who have availed loans up to Rs.2 crore would gain a waiver on MSME loan interest rate (compound interest rate) from March to August 2020.
MSME loans are efficient financing solutions that help small businesses tide over the cash crunch. The economic slowdown affected MSME massively. Subsequently, to save this sector, RBI has come up with the scheme of loan restructuring. Last year, in August, RBI, in its bi-monthly monetary meet, announced to extend provisions for restructuring MSME loans classified as standard (as of March 1st 2020).
As a result, the RBI has declared Resolution Framework 2.0, which enables MSMEs with loans up to Rs.25 crore to benefit from one-time restructuring under the same scheme until September 30th, 2021. This framework is also available for those who have not claimed restructuring under Resolution Framework and had the standard tag as of March 31st 2020.
Benefits of loan restructuring
Businesses that have previously availed the benefits of MSME loans can now utilise the benefits of loan restructuring. These include,
- MSMEs that suffer from poor credit facilities and lack cash flow can get liquidity at a reasonable cost in turbulent market conditions.
- The decision can benefit small businesses in the long run as it will help them restructure the account without classifying it as NPA or Non-Performing Asset.
- Loan restructuring also offers beneficial borrowing options for small businesses that have claimed benefit earlier under Framework 1.0.
- Individuals who have taken business loan for their small enterprises (MSME) can reduce loan EMI amounts by extending their tenor.
Important facts
- Under this scheme, RBI has sanctioned MSME loans up to Rs.10 lakh as priority sector lending.
- RBI also introduced an advanced customer identification process video KYC (Know your customer) to enhance customer convenience.
Eligibility parameters of loan restructuring
- MSMEs that are under stress of economic downturn due to Covid-19.
- MSME loans with an exposure of more than Rs.25 crore can apply for the new scheme. Previously the aggravated exposure cap was set for MSMEs with a turnover of Rs.25 crore.
- Loans in default beyond 30 days (as of March 30th,2020) cannot apply for this scheme.
- The account must be a ‘standard asset’. This account status has to remain the same until invocation is obtained from lenders and the borrower is acquired.
In loan reconstructing, certain financial factors are also considered. These include,
- Assessing the ratio of external liabilities to Adjusted Tangible Net Worth
- Current ratio
- Ratio of debt to interest, depreciation, tax and amortisation
- Debt service coverage ratio
- Average debt service coverage ratio etc.
Here, one must remember that the implementation duration prevails for 180 days after the invocation date. Also, for a resolution plan of exposure of Rs.100 crore and Rs.1500 crore or above, a credit evaluation by a credit agency and expert committee is needed.
RBI has organised a committee of members who have expertise in their respective fields thus can give suggestions regarding the guidelines of this scheme. The presence of an expert committee and lenders’ evaluation of eligibility criteria, financial parameters and ratios will help MSMEs get loan restructuring facilities easily.
MSMEs with a decent repayment track record and classified as ‘Standard’ as of March 31st,2021, can get the facility of loan restructuring as well as business loans from reputed lenders and NBFCs.
NBFCs like Bajaj Finserv extend pre-approved offers to simplify the loan availing experience. These offers are also available on other financial products such as personal loan; credit card etc. individuals can check their pre-approved offers by entering name and contact details.
RBI’s effort towards implementing loan reconstructing will certainly boost the MSME sector and help businesses burdened with MSME loans repayment.
