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COVID-19 can be termed as one of the biggest disasters of 2020. It has taken the whole world under its grip. The pandemic has not only affected the health of people around the world, it has also resulted in a devastating economy whose outcome is totally uncertain and unpredictable. In this article, we would restrict our concern to the MSME and the recent measures taken by Government to revive the situation of MSME.

In a developing country like India, the role of MSME cannot be ignored if India wants to become a Self-Reliant India. It plays a vital role in employment generation in India. This sector contributes 30% to 35% of the GDP, showing a bifurcation of micro (99%), small (0.52%) and medium (0.01%) enterprise. If we see the sectorial distribution of MSMEs, it shows 49% from rural and 51 % from the semi-urban and urban areas.The Covid -19 pandemic has badly affected the MSME sector. In the present scenario, Visualization of future existence of Indian MSME is completely impossible and uncertain. The kind of problems the MSME sector is going to face would be low liquidity or cashflow, lack of work force, lower production and supply. The Government has taken various measures to keep MSME segment afloat like introducing lending to MSME at a cheaper rate, changing the definition of MSME and bringing the service sector under the ambit of MSME. The latest move of the Government is one-time restructuring of advances for MSME sector with certain criteria and restrictions.

Restructuring of advances for MSME - Measure to overcome crisis due to pandemic

Beneficiaries of the Scheme

1. Only those companies and individuals whose loans accounts are in default for not more than 30 days as on March 1, 2020.

2. The loan account should continue to be “Standard” till the date of invocation. The companies which were already in default for more than 30 days as on March 1, however cannot avail this facility.

3. The restructuring of the account should be implemented by March 31, 2021.

4. The borrowing entity should have the GST registration on the date of implementation of restructuring.

5. Industry sources said this could affect revival plans of companies that were about to regain profitability but got hit when the lockdown was imposed.

6. For personal loans, the resolution plan can be invoked till December 31, 2020 and will be implemented within 90 days thereafter. This too is for accounts classified as standard, but not in default for more than 30 days as on March 1

Impact on the Banking Sector

The banks will be able to control the rise in the non-performing assets (NPAs) to great extent. However, the present level NPAs will not change. The surge in the NPA resulting from the pandemic will be checked. This will be a burden for banks. While a section of borrowers who have gone for a moratorium is likely to apply for the scheme, banks won't face much of a problem in working out individual resolution plans: they will have to tackle only borrowers who were in stress after the pandemic hit.

Effect of the restructuring scheme in the past& safeguards

The restructuring scheme is not a new thing and it has been introduced by the Government in the past. However, it was found that the scheme was misused by the corporates. Banks also created a separate CDR cell with erstwhile IDBI overseeing the process of restructuring. The promoters of many big corporates siphoned off bank funds while their units suffered. They approached the CDR Cell and to get their loans recast, some of them more than once. These promoters managed to get fresh loans and they used liberal loan recasts to evergreen their accounts and keep out of the NPA books. Some of them are now in the bankruptcy court. However, the RBI has built safeguard mechanism to ensure it does not lead to ever-greening of bad loans as in the past. Restructuring of large exposures will require independent credit evaluation done by rating agencies and a process validation by the Kamath-led expert committee. To mitigate the impact of expected losses, banks need to make a provision of 10% against the accounts under resolution.


RBI circular for Restructuring of advances

1. RBI/2020-21/17 DOR.No.BP.BC/4/21.04.048/2020-21 August 6, 2020

 All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
All Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Co-operative Banks
All All-India Financial Institutions
All Non-Banking Financial Companies

Dear Sir/ Madam,

Micro, Small and Medium Enterprises (MSME) sector - Restructuring of Advances

Please refer to the circular DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020 on the subject.

2. In view of the continued need to support the viable MSME entities on account of the fallout of Covid19 and to align these guidelines with the Resolution Framework forCOVID 19 – related Stress announced for other advances, it has been decided to extend the scheme permitted in terms of the aforesaid circular. Accordingly, existing loans to MSMEs classified as 'standard' may be restructured without a downgrade in the asset classification, subject to the following conditions:

i. The aggregate exposure, including non-fund-based facilities, of banks andNBFCs to the borrower does not exceed ₹25 crore as on March 1, 2020.

ii. The borrower's account was a 'standard asset' as on March 1, 2020.

iii. The restructuring of the borrower account is implemented by March 31, 2021.

iv.The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST registration. This shall be determined on the basis of the exemption limit obtaining as on March 1, 2020.

v. Asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation may be upgraded as 'standard asset', as on the date of implementation of the restructuring plan. The asset classification benefit will be available only if the restructuring is done as per provisions of this circular.

vi. As hitherto, for accounts restructured under these guidelines, banks shall maintain additional provision of 5% over and above the provision already held by them.

3. All other instructions specified in the circular dated February 11, 2020 shall remain applicable.

Yours faithfully,
(Saurav Sinha)
Chief General Manager–in-Charge



Published by

CA Amrita Chattopadhyay
(Audit & Assurance)
Category Corporate Law   Report

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