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What’s Behind The Clamour For Easier Debt Restructuring For SMEs?

Over the past three years, much of the attention has been focused on large corporate loans gone bad, but stress in the small and medium enterprises segment has also been elevated.

Now, some sections are demanding that the Reserve Bank of India comes out with a scheme of restructuring for SME loans. On Monday, when the RBI Board met, it advised the regulator to consider a scheme to restructure stressed standard assets of Micro, Small and Medium enterprises (MSMEs) with aggregate credit of upto Rs. 25 crore. Details of the scheme are not yet available.

Easier Debt Restructuring?

The demand for some form of restructuring relief comes despite measures already announced to ease the pain that SMEs may face in transitioning towards a more formalised economy.

In February 2018, the RBI said that GST-registered firms would be given some relief in bad loan classification. Unlike the usual 90-day overdue rule followed by banks, these SME accounts should only be classified as NPAs if their payments are overdue by 180 days, said the RBI.

In June 2018, the RBI decided to extend this relief to all SMEs for a small period of time. However, it said that the benefits would be gradually withdrawn starting January 2019.

Once these benefits are withdrawn, stressed SMEs would be subject to regular rules. Under these rules, debt overdue by 90 days is tagged as non performing. Accounts that are restructured are also tagged as NPAs, leaving banks reluctant to lend further to them.

“Banks were looking at some clarification for restructuring smaller accounts as the Feb. 12 circular only pertained to larger accounts,” said V G Kannan, chief executive officer of the Indian Banks Association.

Banks have been averse to restructuring MSME accounts as they are classified as NPAs irrespective of whether these are small or large accounts.
V G Kannan, Chief Executive, Indian Banks Association

Rationally, it does not make sense for MSME NPA norms to be similar to those for corporate lending, added Manguirish Pai Raicker, chairman at the Council for MSMEs. There is a strong case for easier restructuring rules for smaller firms, he added.

Should a special restructuring scheme be announced over and above existing measures, it could alleviate stress temporarily but may not be a sustainable solution, said research house Jefferies in a report earlier this week.

“MSME lending has been an area of risk, especially for public banks and we are still unsure of the risk-reward framework even if temporary relief is provided,” added Kotak Institutional Equities in a separate report.

Stress High But Not Rising Sharply

Data from TransUnion CIBIL shows that loans in the Rs 5-10 crore bucket, along with those in the Rs 10 crore and above segment, are showing elevated levels of non performing assets.

However, the reported levels of stress have not worsened significantly after demonetisation and GST.

“For micro and SME segment, the NPA rates have been largely stable at ~11.5 percent (up 120 basis points over 2 yrs) and ~8.7 percent (up 30 basis points over 2 yrs),” Jefferies said in its report.

Although we are not really sure if restructuring without either economic loss absorbed by lenders or a cyclical growth uptick will result in a sustainable solution, any restructuring scheme should alleviate some stress points.
What’s Behind The Clamour For Easier Debt Restructuring For SMEs?

Just like in the case of large corporate loans, bad loans in the MSME segment are skewed towards public sector banks.

Public sector banks reported a NPA ratio of 15.2 percent at the end of the first quarter of FY19. Private lenders and NBFCs had much lower ratios of 3.9 percent and 5 percent respectively, highlighted the Kotak report said while citing TransUnion CIBIL data.

Credit Flow From Banks

A one-time restructuring scheme helps bring down NPAs in the MSME segment, however it may not do much to solve the problem of limited credit flow from banks.

MSMEs have to deal with banks’disinterest in considering loan proposals from manufacturing units, along with issues related to land, electricity and man power, said Chandrakant Salunkhe, President of the SME Chamber of India. “Despite government directions to clear loan applications in 15 days, most banks take 30 to 45 days on an average for loans to manufacturing MSMEs,” he said.

Data from the RBI’s monthly sectoral lending database shows that banking credit growth to MSMEs has been volatile but has remained below the system-level bank credit growth.

While NBFCs have helped bridge the gap, some fear that the recent liquidity crisis faced by non-bank lenders could slow down credit flow even from that segment.

Recently, the government announced a scheme whereby loan applications by small businesses would be approved in 59 minutes. But bank managers are unaware of such schemes and are awaiting directives from higher authorities, Salunkhe said.

Higher risk aversion and are tighter norms have stifled banks which are the culprits behind the state of the MSME industry, added Arun Singh, lead economist at Dun & Bradstreet. Manufacturing MSMEs have been the worst hit, Singh added.