Majority Of India’s Small Business Shun Restructuring Despite Covid Pain

Fewer than expected small businesses are making use of the restructuring permitted by the Reserve Bank of India, according to bankers. This comes at a time when firms steer clear of debt recasts, which may affect their credit ratings and make future borrowing more expensive.

Small businesses were first permitted to restructure their advances in January 2019. On Aug. 6, the RBI extended the restructuring window for all borrowers, including MSMEs with aggregate loan exposures up to Rs 25 crore. The restructuring scheme would only be available to accounts which were classified as “standard”, or have been in default for less than 90 days, as on March 1.

Lenders say that while restructuring requests have come in, they are fewer than expected.

Lower Demand For Restructuring...

The country’s largest lender State Bank of India has seen close to 50,000 of its MSME borrowers seek restructuring of dues, according to CS Setty, managing director at the bank. The number is less than 5% of the 17 lakh MSME borrowers on the bank’s book.

“SBI is not averse to restructuring the dues of these customers, since they are vulnerable borrowers. Moreover, RBI requires only 5% provisioning for restructuring these loans, which means it is a lower cost for banks,” Setty said. Still, the volume of MSME borrowers seeking restructuring is higher than what has seen across the retail and corporate segments, he said.

At Union Bank of India, the experience has been similar.

“There have been more MSME customers seeking restructuring in the last few months, than retail or corporate segments by volume. Some MSMEs would like to take the benefit to stabilise their cash flows, as receiveables have seen disruption due to Covid-19,” said Rajkiran Rai, the bank’s managing director and chief executive. “But the total number is still much lower than what was expected.”

As on Sept. 30, SBI reported Rs 1,100-crore worth restructuring requests from MSME borrowers, while for Union Bank of India the number stood at Rs 500 crore.

The experience among smaller lenders resonates with what large banks have seen. Rajeev Yadav, chief executive officer of Fincare Small Finance Bank, said it has actively educated customers about the pitfalls of restructuring. Since most of the enterprises which the small finance bank finances are micro in size, a debt restructuring could have unintended consequences on the company’s future.

“As a bank, we are of the opinion that customers can always seek some more time to repay their dues, without necessarily going for restructuring,” Yadav said. “There’s a systemic impact due to restructuring and it can affect funding opportunities for borrowers.”

...Or Is It Lower Supply?

According to Chandrakant Salunkhe, founder and president, SME Chamber of India, fewer restructuring requests don’t hint at lower stress among MSME borrowers.

“If the patient is suffering from a virus, they have to go to the doctor. Similarly, MSMEs will need restructuring to come out of the impact of the pandemic,” Salunkhe said. “Banks are discouraging borrowers from seeking restructuring, but it is not their call, it is that of the borrower.”

Lenders also say the government’s emergency credit linked guarantee scheme has helped cut back on restructuring requests. In May, the government announced that banks can extend loans up to Rs 3 lakh crore to MSMEs with 100% government guarantee. Borrowers could avail up to 20% of their outstanding dues as emergency funding.

By Nov. 28, banks and non-banking financiers had already disbursed loans worth over Rs 2 lakh crore to 55.69 lakh borrowers under this scheme.

According to Salunkhe, while it’s true that funds under the ECLGS scheme are reaching borrowers, a lot of this is being used to repay banks and keep accounts standard, without restructuring. “This does not help the companies in any way,” he said.

Cost Of Restructuring

Small businesses may also be avoiding the costs associated with restructuring. On average, rates charged by lenders for a restructured account will rise by anywhere between 50-100 basis points from existing levels, bankers said.

“There is a cost involved with restructuring, which most borrowers would not be keen on taking, as it also hampers future lending,” said Raman Aggarwal, chair-NBFCs at Centre for International Economic Understanding. “The number of requests are also lower because NBFC bodies have lobbied to get individual business owners added to the beneficiary list of the ECLGS scheme, which has covered more borrowers.”

Aggarwal said that just like with banks, NBFCs too have seen fewer borrowers seeking restructuring.

The lower demand for restructuring is not limited to smaller enterprises. According to a report released by Crisil Ltd. last month, 99% of the non-MSME companies rated by the rating agency were unlikely to opt for restructuring. This is despite two-thirds of the companies being eligible for the one=time restructuring.

According to Crisil, apart from the fear of lower credit rating, nearly 44% of large corporates said that over three-fourths of their debt comprised short-term working capital facilities. That makes availing the RBI’s debt recast scheme to defer principal repayment on long-term debt a redundant exercise, the rating agency said citing feedback from companies surveyed.