Saurabh Jhalaria, Head - SME Lending, InCred Finance

RBI’s announcement on debt recast for MSMEs is a very timely decision as the ongoing pandemic continues to disrupt cash flows and normal functioning of the MSMEs, amplifying the economic stress that is on the verge of spilling over to financial sector if left unaddressed. With the end of the moratorium period of loans, one of the feasible alternatives to tackle this stress was to restructure ongoing debt facilities as a comprehensive one-time relief package. By permitting restructuring of loan accounts which were standard on March 1, 2020, RBI has restricted the relief to viable businesses stressed on account of COVID-19 and therefore obviated any moral hazard concerns.

While incumbent players have significant experience of restructuring of advances, what is different at this point of time is the uncertainty about how the pandemic is going to pan out.  Among other parameters, restructuring decisions will be based on:

  • The genuineness of reasons to merit restructuring
  • Borrower’s action plan to work with the constraints and restore normalcy.
  • Viability of the business post restructuring
  • Projected revenue generation and free cash flows to service the debt within the time frame
  • Scope of additional capital infusion by the borrower
Impact on MSMEs

MSMEs need support from the ecosystem even during the best of times; with COVID-19 impacting all sections of the society, the need to extend unwavering support to this segment is more urgent than ever. Due to restrictions in movement, reverse migration of the workforce, disrupted supply chain, choking of trade receivables and fall in consumption levels, financial stress for the MSME borrowers has increased significantly. This stress has the potential to impact the long-term viability of a large number of firms, that otherwise have a good track record, due to their debt burden becoming disproportionate relative to their cash flow generation abilities.

The restructuring of MSME accounts coupled with the Government’s emergency credit line will help the MSMEs to restart business with no immediate pressure of loan repayments. The move will provide the necessary relief and help rebuild resilience and stability for the sector that has experienced one of the most severe impacts of the pandemic.

Impact on lenders

As per a recent RBI analysis MSMEs were the highest proportion of loan segment, in terms of amount, to avail the moratorium facility. Around 65 per cent of loan outstanding for MSMEs were under moratorium till April 30. The debt restructuring will also provide a huge relief to the lenders, as a substantial increase in the NPAs in the MSME segment was expected after the end of the moratorium period. RBI’s restructuring norms will provide lenders with an opportunity to keep viable accounts as standard in their books – a large proportion of assets that otherwise would have slipped to the gross non-performing assets (GNPA) pool will now be restructured by lenders.

While the restructuring of assets will help keep bad loan numbers under control through the duration of the scheme, there is danger of a surge thereafter. A successful resolution of these accounts will depend on the revival of the economy, the prudent filters used for identifying accounts for restructuring, critical assessment, and close monitoring.

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