By Satish Singh
On May 5, 2021, the Reserve Bank of India (RBI) announced a slew of measures to help common men µ, small, medium enterprises (MSMEs) to recover from the hardships caused by the Corona pandemic, among which announcement of debt restructuring of loan accounts may be beneficialto MSMEs up to great extent. According to rating agency CRISIL, around 3,400 companies will be eligible to avail the debt restructuring scheme. These companies have taken loans of about 50,000 crore rupees from banks. However, the number of companies opting for debt restructuring may remain small, as the impact of the pandemic is limited to a few sectors so far, but the loss to small businesses cannot be ruled out. However, small businesses have not yet recovered from the first wave of the pandemic. In such a situation, the second wave can give them more trouble.
CRISIL works to give ratings to about 6,800 small & mid-sized companies. According to CRISIL, retail, hospitality, vehicle dealerships, tourism, real estate sector etc. will have the greatest impact of the pandemic. On the other hand, the pandemic will not have much impact on the chemicals, pharmaceutical, dairy, technology and FMCG sectors, as the demand for companies in these sectors has not come down, hence, companies in these sectors will not opt for debt restructuring scheme.
Individual borrowersand MSMEswho have taken loans up to Rs.25 crore will be eligible for restructuring. Borrowers can get their debt restructured for 2 years. This facility will be available till 30thSeptember 2021 and banks will restructure the loan within 90 days of receiving the application for loan restructuring. However, this benefit will be given to those borrowers or units whose loan account was standard till 31 March 2021. However, borrowers who have not paid their dues to the bank for 89 days can also take advantage of debt restructuring. This means that if the debt has not been repaid in an account for one or two months, then they can also avail the debt restructuring facility. According to the RBI, in the year 2020, individual borrowers and small businessmen who have a debt restructuring facility of less than two years can request to extend their repayment period to two years.
According to bankers, the problem with debt restructuring is that banks will have to keep 10 percent of the loan amount as a reserve for provision requirement. It means that they will not use this amount for lending. Earlier, banks have to keep 15 to 20 percent of the amount as a reserve at the time of debt restructuring, but under the one-time debt restructuring scheme announced last year by the RBI, banks were asked to keep 10 percent as a reserve. Bankers say that due to keep 10 percent amount of debt restructuring as reserve, banks have to face capital shortage.
To provide relief to the businessmen during the Corona pandemic, there is a demand to suspend the Insolvency and Bankruptcy Code, 2016 (IBC) process once again and it is expected that the Government will accept this demand considering the current situation, because suspension of IBC process will give companies a chance to correct their financial situation to deal with the pandemic. Therefore, banks andcompanies should not be hasty to be taken to the National Company Law Tribunal (NCLT) under IBC. If the IBC is suspended for the next 3 or 6 months from April 2021, then big companies will get a big relief.In March 2020, the IBC was suspended until March 2021, to help companies deal with the challenges posed by the lockdown. The functioning of IBC was resumed in April this year, but at present, banks are not showing much interest in carrying companies to NCLT. According to data from the Insolvency and Bankruptcy Board of India (IBBI), the number of insolvency cases stood at 1,717 in December 2020, which is about 12 percent less than in September 2020.
Small enterprises battling the second wave of the pandemic have urged the Finance Minister to change the classification criteria of non-performing assets (NPAs) and rationalize the import duty on major raw materials such as iron and steel. According to industrial organizations, the current NPA classification rules are for normal days. This should be made easier in the pandemic, as the lockdown at the state level has disrupted the payment cycle of traders. As per industrial organizations, there should be flexibility in banking rules, so that positive changes can be made according to the situation. Not making the necessary changes in the NPA rules may adversely affect MSMEs.
Commercial banks have also requested the RBI to make the NPA classification criteria logical for MSMEs. The lockdown imposed by the states to overcome the second wave of Corona pandemic has increased the pressure on the MSMEs. Bankers have requested the RBI to extend the current 90-day period to 180 days to consider loans in the MSME sector to be NPAs. Bankers say that the MSME sector is already under pressure and after the second wave of Corona, the situation in this segment will become worse. Therefore, there is a need to provide relief for two years or till the situation improves. According to Basel-3 guidelines, NPA rules can be made easier according to the circumstances. Small businessmen also want the import duty on raw materials like iron, steel, copper, aluminium, and polymers to be rationalized, as the price of domestic products has been increasing for the past 6 months.
The RBI will auction Rs.10,000 crore for Small Finance Banks (SFBs) every month under a special long term repo operation (SLTRO). The first auction of ten thousand crore rupees will be held on 17th May and the remaining amount will be auctioned on 15th June next month. The SLTRO will remain intact until October 14 or until the remaining amount is fully utilized. It will be valid for 3 years. All SFBs will be eligible to participate in the scheme. With the help of this scheme, the negative effects of the pandemic will be reduced. However, the SFB will have to ensure that the money borrowed from the RBI will be used for the unorganized sector affected by the pandemic. This borrowing can be used to give loans up to 10 lakh rupees.
Recently, the RBI announced a corona pandemic package of Rs.50,000 crore, aimed at providing funds to vaccine companies, medical device suppliers, hospitals and patients receiving treatment for the corona. Rs.50,000 crore emergency healthcare loans will be provided by banks till 31stMarch 2022, which can be repaid in 3 years. These will be classified as primary sector loans. Banks do not have to maintain cash reserve ratio or statutory liquidity ratio for primary sector loans and this loan is available at a discounted rate.
Banks can raise money for this at the repo rate. Under this, loans can be given to vaccine manufacturers, importers, suppliers of vaccine, medical equipment, hospitals, dispensaries, pathology labs, oxygen and ventilator manufacturers, importers of Corona medicines, logistics firms and patients for treatment. Banks can give these loans directly or through intermediaries and for this they have to open a corona loan accounts. The RBI said that the lender can deposit its surplus amount with the RBI at 25 basis points less than the repo rate. This amount will be in proportion to the outstanding of corona loan accounts. At present, banks deposit their surplus amount with the reverse repo rate of 3.35 percent to the RBI. This amount of Rs.50,000 crore provided by the RBI is about 9 percent of the total health expenditure of Rs.6 lakh crore of the country. With this direct assistance, a demand of about 80,000 crore rupees is expected to be generated in the health sector and this will also benefit biochemistry, rubber, plastics etc. sectors. `
Last year the pandemic messed up the lives of metros and small towns. But rural India had not been much affected from this, which provided support to companies that make and sell consumer goods, but the second wave of pandemic has caused havoc in the villages. As a result, villagers are spending their money judiciously. Consumers in villages are avoiding spending over unwanted articles. They are saving money for health emergencies. Sales of tractors, two-wheelers and consumer goods and equipment have also seen a decrease due to the lockdown in the states.
The government and the RBI have taken some measures to deal with the corona pandemic. In the current perspective, there is a need to loosen up the NPA rules and suspend the IBC process for a few months. This is a difficult time and there is a need to save both life and livelihood.
(Author is Chief Manager at State Bank of India, Mumbai and editor of “Aarthik Darpan” an in-house journal of SBI. Singh is also a freelance writer. The views expressed are personal opinion of the author. He can be reached at satish5249@gmail.com and singhsatish@sbi.co.in.)
