Banks Begin To Consider MSME Loan Restructuring After Finance Minister’s Nudge

Lenders have started considering restructuring loans to stressed small businesses after the government backed the central bank’s eight-month-old debt recast scheme for such borrowers, according to three senior public-sector bankers.

Last week, Finance Minister Nirmala Sitharaman said no micro, small and medium enterprise will be classified as a non-performing asset till Mar. 31, 2020. She pointed out that the Reserve Bank of India had come out with an enabling circular and banks must follow it.

The norms allow banks to restructure the debt of MSMEs with aggregate loans up to Rs 25 crore and classified as standard accounts as on Jan. 1, the day the RBI issued the circular. While banks don’t have to tag these accounts as bad loans this fiscal, they have to make an additional provision of 5 percent, over and above whatever they held, for such accounts.

Outstanding loans to small businesses—up to Rs 25 crore each—stood at nearly Rs 15 lakh crore as on June 30, according to the quarterly MSME Pulse released by Small Industries Development Bank of India and TransUnion CIBIL Ltd. Bank credit contributed about a quarter of that. Gross bad loans for such MSME loans was 8.8-10.8 percent.

The central bank’s relief came as small businesses were struggling to recover from the disruption caused by demonetisation and goods and services tax. It was the second such breather in six months. In June 2018, RBI had allowed banks to classify GST-registered MSME accounts with aggregate debt of Rs 25 crore or below as standard till May 1, 2019.

Both the moves were seen as a return to forbearance for RBI, something the regulator had avoided since 2013 as it let banks show structurally weak accounts as standard. Still, the finance minister had to remind bankers that they have the tools to deal with stressed MSMEs.

Three bankers quoted earlier said, on the condition of anonymity, that when the RBI came out with its directions in June last year, bankers used it aggressively. Around Rs 10,000 crore worth of MSME loans were classified standard under the norms, the first banker said. RBI’s August 2018 Mint Street Memo put the number at Rs 12,900 crore.

Over time, it became obvious that MSMEs were not just going through a temporary liquidity hurdle but were facing serious business troubles. In the April-June quarter, most public sector banks showed a spike in their MSME bad loans as the relief window provided a year ago closed.

Since MSME loans are low in value and high in volume, any restructuring effort would have led to a considerable effort for banks, two of the three people quoted earlier said. After the regulator’s January relief, banks were less inclined to restructure the debt of smaller borrowers.

Another fear that banks have regarding MSME loan restructuring is investigative agencies questioning their motives later.

An RBI committee found as much. The expert panel on MSMEs said in its June report that there was some hesitation among bankers in using the restructuring norms. This was primarily noted in accounts that had turned into NPAs after Jan. 1.

“The classification of any account as NPA triggers an internal staff accountability exercise as per extant guidelines. There is a concomitant fear of investigative agencies,” the committee said. “The second reason is that for such MSME NPA accounts there is no visibility of future viability. Cash flows remain uncertain because of delayed receivables and the borrower has already used up available resources to keep operations going, leaving nothing for fresh equity.”

To be sure, the health of the MSME sector depends heavily on what happens in the rest of the economy. Since these companies tend to provide services to larger companies, any slowdown is severely detrimental.

According to India Ratings & Research’s banking outlook, RBI’s easier restructuring norms for MSME loans could put additional pressure on bank asset quality in the next financial year. “Some of the incremental stress in this segment could show up in FY21, unless the economy picks up,” it said.