Restructuring of MSME advances: What are RBI guidelines?

After the onset of COVID-19, businesses in India faced drastic losses which impacted the GDP of India. So many shut down their companies and defaulted on their business loans. To tackle the nonpayment of loans, RBI decided to enact a policy that helped the restructuring of MSME advances.

What is restructuring of MSME advances?

This term means that business loans taken by MSMEs will be restructured based on the guidelines published in the RBI policy. Loan restructuring means modifying the terms and conditions on a business loan sanctioned by a bank or NBFC to make the repayments easier for MSMEs burdened by COVID-19.

This was a scheme introduced by the Government of India in collaboration with RBI to reduce the number of defaulters on business loans during the pandemic. This scheme could be availed by eligible MSMEs until September 30, 2021.

RBI guidelines on restructuring

RBI published two circulars regarding loan restructuring for MSMEs which indicated the guidelines that banks should follow while restructuring MSME loan accounts. The first circular was published on January 1, 2019, and a second one on February 11, 2020 to intimate banks and MSMEs of an extension to apply for restructuring MSME loan accounts.

The first circular is regarded as the master circular on restructuring of advances and the second circular issued is the latest RBI circular on restructuring of loans. Both the circulars put forward RBI guidelines for restructuring of NPA accounts.

“With a view to facilitate meaningful restructuring of MSME accounts {MSME as defined in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006} that have become stressed, it has been decided to permit a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification,” writes RBI in its first circular.

It is important to understand the term Non-Performing Assets (NPA) and asset classifications under NPA.

According to RBI, “an asset becomes non-performing when it ceases to generate income for the bank”. As of March 31, 2004, all loan accounts that are 90 days overdue are identified as NPAs.

Standard assets and substandard assets come under NPA. Standard assets are loan accounts that will give a regular income to the bank once they are due, and the only risk associated with it is losses faced by the business and eventual default. Substandard assets are assets which have remained NPA for a period less than or equal to 12 months.

Importance of restructuring of MSME advances

Restructuring MSME advances was introduced by the RBI to extend a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification.

Usually, a business loan is a standard asset for all financial institutions. When a business applies for loan restructuring the loan is downgraded to a substandard asset from a standard asset. Under the one-time restructuring policy by RBI extended during the pandemic banks are permitted to restructure loans without downgrading the asset classification to substandard.

The option for restructuring is only extended to ‘stressed’ loan accounts. When a bank gets an application for loan restructuring from an MSME they first identify if the account is stressed on account of the economic fallout from COVID-19.

Following are the parameters, banks use to check if a loan account is stressed or not:

• Reduction in turnover by 10% or more from FY 2019-20 to FY 2020-21
• Capacity utilisation of the unit reduced by 10% or more, if the entity is able to justify with the documentary proof.
• If unit was working during 2019-20 as per the available unit visit report/financials of the firm and same has been closed during FY 2020-21.
• Self-declaration by the borrower in case of exposure up to ₹10 lakhs that their business has been affected by COVID-19.

Also read: What happens when you are unable to repay business loan EMI?

Who is eligible for restructuring?

As of the amended version of RBI guidelines released on the February 11, 2020, the eligibility criteria are as follows:

• MSME must be GST registered on the date of implementation of the restructuring except for MSMEs that are exempt from GST-registration.
• The borrower should be classified as a micro, small or medium enterprise as on March 31, 2021.
• The borrower’s account was a ‘standard asset’ as on March 31, 2021.
• MSMEs with business loans must have been making regular repayments and the loan payment due hasn’t crossed 30 days of non-payment as of March 1, 2020.
• The total amount of loans taken by the borrower, including non-fund-based facilities, should not exceed ₹25 crore as on March 31, 2021.
• MSMEs with business loans from financial institutions including commercial banks (including small finance banks, local area banks and regional rural banks), primary (urban) co-operative banks/state co-operative banks/district central co-operative banks, All-India Financial Institutions and NBFCs can apply.

Also read: 10 Question you should ask the bank when applying for a business loan

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